PCP the next Sub-Prime Mortgage crisis??

[grober]

https://www.theguardian.com/money/2...s-driving-us-towards-the-next-financial-crash

Car financing in the UK is a “flashing light”, according to Andrew Evans, a fund manager at investment firm Schroders. “Borrowing is a very bad idea when it is done against a depreciating asset … such as a car,” he said, adding that there was a “serious level of fragility built into the system”.

The Bank of England is expressing concern of the level of private borrowing since BREXIT.
The financial policy committee (FPC) announced last week it was launching a review into the credit quality of new lending – underwriting standards and the risk models used by banks – and said it would scrutinise these findings over the coming months.
https://www.theguardian.com/money/2...d-sounds-new-alarm-over-consumer-credit-binge

 

[markjay]

Not sure I follow the Guardian's rationale.

House mortgaged are based on the house price at the time if purchase and there is very little leeway for depreciation. In case of deprecation, it is simply expected that the borrower continues paying the monthly instalments as per normal. Of course, massive job loses and house market depreciation are a double whammy.

(And some people borrowed beyond their means of repayment in the hope the asset appreciation will allow them to sell it and pay back the loan while pocketing a nice profit - in a similar way to how conmen use clients' investment money for gambling in the hope that one big win will sort everything out)

But in the case of the car finance market, asset depreciation is a given and taken into account. What is the risk then? Massive job loses and the second hand car market collapsing? Possibly, but this will mean that the deprecation is more than expected, as opposed to the housing market which saw anticipated appreciation making a sharp U-turn into massive deprecation.

So yes, there is a risk there, but it is much smaller and not really comparable to the sub-prime mortgages crash of 2007/2008.

 

[grober]

I don't think its the Guardians rationale. They are just reporting various financial "experts" expressions of concern. I suppose things like "exposure" and "risk/asset analysis" come into it. If a few borrowers default on their loans its one thing but if many do it then it destabilises the market. If 50 people default and hand their cars back then the bank/finance company has recoverable equity in the cars they sell on. If however 5,000 do so then the value of the "secured assets " is going to plummet as there are simply not enough buyers around to mop up the surplus. This can all be modelled of course but the financial authorities are questioning the validity of the model? Banks hell bent on lending money they don't have-- surely that's going to happen--- again.

 

[S205-FTW]

. “Borrowing is a very bad idea when it is done against a depreciating asset … such as a car,” he said,

And even worse than borrowing on a depreciating asset is having bought one with cash!

How many people on a PCP or Lease are worried about diesel residuals due to events in the past 18 months? Zero.

 

[Dryce]

With cars the asset depreciates anyway - so if the consumer loses it's transient.

PCP actually caps the consumer's losses if the market takes a funny turn.

So the risk is a squeeze in the car market if consumers lose confidence or get squeezed.

Not the same as houses or assets that are more persistent and have long term values on balance sheets or as collateral or bought as investments.

So yes - anybody looking at the economy might view the amount of car finance as being at an unhealthy level but it's something that involves short term finance and a short term correction. The longer term risk lies with the likes of BMW and MB who have a business model that depends on this finance mechanism to shift metal. If the consumer appetite for this model changes then they have a problem.

 

[Red C220]

The thing with PCP is there an asset which the credit is secured against. I read the BoE statement and felt it was more aimed at unsecured, unchecked lending such as zero percent CC debt being passed from card to card.

The elephant in the room is interest rates. Not any particular product.

With Brexit now a reality and a fixed time scale, UK plc needs to make itself attractive to foreign investment, increasing interest rates is usually how you'd go about this along with other tools. Yet it would be catastrophic to the retail economy and mortgage holders/ house prices so what to do?

Do we create a corporation tax haven and deal with the ethical fallout of that?

I have a feeling the choice will actually be out of our hands, there are global changes on the horizon. China is on the brink of financial meltdown and the Donald is poking Russia and North Korea.

PCP could genuinely be the least of our problems.

 

[pembssurf]

And even worse than borrowing on a depreciating asset is having bought one with cash! How many people on a PCP or Lease are worried about diesel residuals due to events in the past 18 months? Zero.

What do you have at the end of the 3 years of ££££ payments .... ? Also if people default on a car PCP then there is the negative credit black listing which means they then have neither got a car or anyway to finance one in the future. Honestly, interest rate rises are going to shock a LOT of people!

 

[MikeInWimbledon]

Who created the car finance market?

It's the Bank of England that created "an offer that you can't refuse" when it drove interest rates down using £375 billion worth of Quantitative Easing.

This year's credit crunch will be real enough, but it won't be driven by people walking away from PCP's. It'll be a collapse in Buy to Lets as Baby Boomers cash in before they lose their leveraged pension "investments."

 

[David404]

Its probably that PCP is just part of the mix, BoE looks to be getting worried about the totality of household debt.

All down to personal circumstances, how secure your job is, other debts and where you are in overall lifecycle. Personally I've never purchased a new car and (mega lotto win aside) probably never will, just cant face the depreciation, that's why I have an 09 plate car, its still my pride and joy and still drives much as it would when new.

 

[DRIVER200]

I work depreciation out on what it would cost to hire the same car per week/month. So for example my car would probably cost around £6-800 a month -and that's being very conservative- that's £9600 per year so £28,800 over three years. I don't expect my car to depreciate by nearly £30,000 in three years so that's why I never mind buying new cars not to mention warranty etc.... Obviously if I keep it for 6-8 years then eventually it will be a good deal... but I don't.

 

[S205-FTW]

What do you have at the end of the 3 years of ££££ payments .... ? Also if people default on a car PCP then there is the negative credit black listing which means they then have neither got a car or anyway to finance one in the future. Honestly, interest rate rises are going to shock a LOT of people!

What do you have after renting a car for your 2 week holiday in Spain? The answer: use of a car for 2 weeks that someone else owns. Some people are happy not owning the car they use. Simple as.

Some people really struggle to grasp the concept.

Interest rate rises will be hitting homeowners way before it hits PCP. Most PCP rates are 5-7% so the financing arms are already making a tidy profit. They can swallow a 1% rise in BBR whereas most residential lenders will pass this straight onto a SVR or tracker.

 

[Delayed Steve]

What do you have after renting a car for your 2 week holiday in Spain? The answer: use of a car for 2 weeks that someone else owns. Some people are happy not owning the car they use. Simple as.

Some people really struggle to grasp the concept.

Interest rate rises will be hitting homeowners way before it hits PCP. Most PCP rates are 5-7% so the financing arms are already making a tidy profit. They can swallow a 1% rise in BBR whereas most residential lenders will pass this straight onto a SVR or tracker.

Let's face it, buying or renting a car is a total waste of money. It's all about vanity !
Whether you buy ,rent or PCP you're going get ripped off. You're going lose a lot of money and a Fiat Panda will do the same job,but won't look as good ! Vanity ?
When the interest rates go up people will pay the mortgage first and the car will come last, the finance companies will then start to lose money and then it's 2008 all over again and it's nobody's fault but our own for signing the finance forms.

 

[Dippo]

I'm still not convinced by the Guardian's figure of 9 out of 10 private buyers buying on PCP. I bought my new car on finance last month - and I'm paying it off in full this month. The finance just gives you access to manufacturer support that would otherwise not be available.

 

[whitenemesis]

But as far as the Guardian are concerned you are buying on finance. I'm sure 'finance' buyers are the same...

 

[Will]

I think a lot of this stems from the modern day sense of 'entitlement'.

Many people think they should be entitled to drive a new/newer, or more expensive/luxurious car than they perhaps realistically should?

The keeping up with the Jones's, showing off, not being outdone by your neighbours or peers. Office car park pride, bragging rights etc.

The fact that around 9/10 cars are financed does show that this is at present very affordable (for most), and no doubt almost exclusively fuelled by the ridiculously low interest rates of present. Ie cheap lease/finance offers - but similarly low mortgage payments hence more spare 'monthly cash'.

What I do think though is that the rise in interest rates won't be affecting this model directly, but once people panic as their mortgages rise and the 'fun cash' margins disappear they will re-evaluate their monthly outgoings (or have their arms twisted if they can't pay!) and we'll start to see more people 'making do' with older/less expensive cars.

Manufacturers will probably be the biggest losers in all this. If 9/10 cars are sold on finance and the cash stops getting pumped in I can see a lot of empty showrooms and glum salesmen on the horizon!

Why do so many people want/need a new car anyway? I've driven all sorts of cars over the years and I just don't really see the appeal - modern cars are so reliable and durable that I just don't see what's wrong with driving one say 5-10 years or whatever?

Each to their own and all that but I'm surprised so many people just go and get a new car because they can - but then that's straight back to my first point

 

[Dryce]

I think a lot of this stems from the modern day sense of 'entitlement'.

Many people think they should be entitled to drive a new/newer, or more expensive/luxurious car than they perhaps realistically should?

So somebody offers you some nice goods or a service at an affordable price - and you say "that's nice I'll have some".

Meanwhile I look on and post an article about your sense of entitlement and how you're obtaining better services than you perhaps realistically should.

Seriously?

It's just a bunch of car manufacturers moving metal. If people want to pay then let them. The short term risk is with the customer - the manufacturers are the real addicts in this particular scheme - they manipulate their pricing and discounts and structure finance to fit with *their needs*. The long term risk is with them because if the scheme breaks down they are likely not to be in a gopod place.

People aren't buying MBs or BMWs this way because they feel entitled - they're just doing it because they can.

 

[EClassy]

I just will never get this thing about people worrying about what other people spend their money on. The monthly payments are currently obviously affordable for the people who buy these new cars.

At work when I see someone who buys 3 coffees from Pret daily, I feel smug drinking the free rubbish office coffee thinking I am saving money. The reality however is at the weekends I am out spending hundreds on liquor in clubs and bars. So am I really smarter than the Pret regulars?

My point is people will spend their own money on whatever tickles their fancy. If its £300/month on a shiny new Merc its nobodys damn business.

Not a dig at anyone but the people who moan the most about others driving new cars they cant afford usually drive bangers but always let us know they can afford the new cars too. We really dont care!

By the way. I just cancelled an order for a C cabrio which I was going to buy on PCP even though I have the cash to buy it straight out. I have instead gone and bought a reasonably powerful used sportsbike ( didnt go new cause I always drop em) and will use my cash to pay off half of my mortgage. Aint I some smart bunny

 

[Will]

I think perhaps my point has been somewhat missed. It's not one specific demographic that only buys MB or BMW, more the fact that a lot more people are choosing new/newer (or more expensive) cars than they realistically need or can afford right across the board - which are only available to them at the moment due to cheap lending.

Isn't that what the article is about - the concern over the lending behind this? The fact that despite 9/10 new cars being on finance people are getting themselves and their households into growing amounts of debt? How long is this sustainable for?

I don't care what people spend their money on either, just an observation as to why so many people do sign up for new cars when realistically the same people didn't need them a few years ago. You can't just blame the manufacturers for offering them - the demand is there from the cheap borrowing and people's desire to drive something 'aspirational' I guess. Yes, I know there's the 'because they can' thing but I also think some of this stems from competition and a sense of entitlement. People benchmark themselves against their peers - doesn't this happen throughout life?

The concern is that the level of borrowing is getting out of hand - that's not my opinion, it's the concerns shown by the Bank of England etc in the article posted.

 

[Deleted member 6183]

There is some regulatory focus on unseecured borrowing this year.

As I understand it the FCA have concerns around the way that lenders and consumers are behaving around unsecured lending and, in particular, credit cards.

Credit card debt is enormous and there is a sector of the population who are simply swapping the debt from card to card with no hope or means to repay the debt in the short, or sometimes long, term. There is a tendancy to view 0% credit card debt as free money and some punters have run up massive debts in this way but see 0% as no problem despite the fact that they are not significantly reducing the balance and may have no hope of ever clearing it. I see the problem as one where the consumer never actually takes advice when taking out credit card finance as it's simply an online or postal application and it is up to them to read the small print rather than have it explained properly.

Car finance falls between the two stools of secured and unsecured lending as, while technically unsecured, the car is usually security for the debt.

My understanding is that car finance is outside of the scope of FCA focus for this year at least but I'm confident that it will become a keey focus in the future.

My final point is that car finance may well be a bubble fit to burst but those affected are more likely to be the providers rather than the customer in this instance, consumer credit rules allow for the goods to be handed back in a very different way to home finance which could see finance companies becoming used car salesmen rather unexpectedley.

 

[pembssurf]

My point through all this is WHEN the next credit crunch happens what will the majority of people who are ONLY just keeping up the payments as in only an extra £100 buffer every month, how are these people going to cope with an extra 1 or 2 % rise? What happens when they can't afford to make the repayments? What happens when you loose the car or have to change to a smaller more affordable car and then the banks tighten up on lending criteria and you can't access easy credit again. Coupled with this you have been making car payments for the past 3 years on a monthly basis thus have no significant capital or positive equity to put into a new form of transport be it used or new. The replies to this thread just reinforce that a vast majority of people are only concerned with the here and now and are totally unaware that when interest rates plateau at low low levels historically they ALWAYS have spiked upwards, massively, in a short period of time (market correction). Now either a lot of people are sticking their heads in the sand with this or people really are stupid enough to think history will not repeat itself again.