The Financial Conduct Authority (FCA) have voiced their concerns over the loan default rates for high-risk borrowers as interest rates rise. One area of particular worry is the subprime car finance industry.
The FCA has looked at the growing levels at which borrowers with poor credit ratings are defaulting on car loan payments. They feel that if the economy was to worsen in the next few years, it could act as a tipping point which could trigger a massive spike in loan defaults, similar in scale to the housing market crash of 2008.
Growing problems
The FCA report looked at arrears and defaults on car loans and found they had increased somewhat, in particular for ‘higher credit risk consumers.’ Their concern is that borrowers are being issued high-interest loans when they have a poor credit rating and brokers are making huge profits without considering the problems the borrower could face.
The FCA is sending out mystery shoppers to assess the customer journey process in purchasing a car. These shoppers will check whether lenders are complying with regulations and make sure they are giving consumers enough information about the loans they are taking on and more importantly, declining those who fail to pass their credit checks rather than providing easy subprime credit to those they know may not be able to afford it.
Ongoing enquiry
The latest report is part of an ongoing enquiry into the car finance industry that the FCA announced in April 2017. At the time, it said it was concerned about a ‘lack of transparency’ in the industry and was conducting a full enquiry. The results of this are due in September, but the FCA has issued an interim report with some findings. Generally, the report’s findings are positive, but there are worries about this particular area.
Jonathan Davies, executive director of supervision for the FCA said the news was good so far, but the highlighted problems with poor credit rate consumer defaults are something worth watching. In current favourable credit and economic conditions, the problem isn’t a big one, but their worry is if things take a downward turn with Brexit, the situation could get a lot worse quickly.
Debt level concerns
The FCA report is just one that highlights a growing concern about a time bomb of borrowing. Debt levels in the UK are close to the peak from September 2008, and a ‘significant’ number of households are in so much debt that even a small change in circumstances would mean they were in financial trouble.
Bank of England figures show that consumer credit rose 9.3% in the year to January 2018, a slight decline on the previous period but still close to the pre-Financial Crisis levels. While circumstances are different to a decade ago, there are still worrying numbers of people that are close to being in too much debt, the FCA admitted.
Car finance is highlighted, but other areas also show potential problems. One in five mortgages is interest only, taken at the height of the credit boom by people with little equity in their homes and not much disposable income. These won’t mature until the 2030s. Arrears and default rates are still low, but if the economy takes a downward turn, these problems could escalate.
New car finance
Another area of concern is that new finance contracts now account for 88% of the new car registrations in 2017, compared to just 59% in 2008. The average value of those contracts has also increased from £13,500 in 2013 to just below £15,000 in 2016.
This paints a picture of people buying a more expensive car on finance, putting down a smaller deposit and having potential repayment problems down the line. The most significant area of growth remains among those with higher credit ratings, but those with lower credit scores were more likely to run into trouble.
Personal contract purchase agreements or PCPs are a popular option for people due to their low monthly repayment, but these types of agreements are particularly vulnerable to the change in economic status. And with the uncertainty around Brexit still firmly in the mind of the FCA and others, there is a concern that people who are just affording their car payments now may find it impossible if things take a downward spiral in a post-Brexit no deal environment.
What do you think about car loans being given under high-interest rates and low credit terms? Is the FCA overreacting to this and blaming the threat of Brexit or their concerns valid and real? Let us know in the comments below.
I thinks it’s a big risk to the economy and it’s high time the car finance sector is regulated. If bad loans were given to home buyers it would have been better than bad car loans because cars are not extremely necessary items everybody needs. Properties that get repossess are snatched up fast by other consumers that desperately need a roof over their heads. Cars/vehicles are riskier liabilities because they depreciate so fast, especially in the United Kingdom.
Again, greed is the problem here similar to how greed spoils everything in the U.K. the car consumer is being exploited by lenders and the economy is at risk. Let’s hope the car finance sector will be regulated soon
Everything is overregulated already. We don’t need anymore regulations and government meddling. FCA regulates all finance companies selling financial products. A basic principle is customer’s interest. If a loan is unafordable it it may become unafordable down the line, the lender has to reject the allocation. It is already in the regulations. What more regulations do you need?
It’s all due to greed by brokers and lenders alike. As well as greedy customers.
We were suckered into a “we can give you finance deal” over 20 years ago now. Not only was the interest sky high the loan also worked in the manner of a mortgage inasmuch as you were effectively paying largely interest for a long time meaning your amount borrowed would barely decrease. If this practice continues it should be banned forthwith!
Another issue in recent years is PCP (we’ve not entered into this one) but the temptation of a new car for a couple of hundred is too much for many, this monthly outgoing would be better spent on raising family living standards rather than perpetuating a lifetime of debt – chasing the next new car that you will never own!
I think people should start to take responsibility for their own spending. If you can’t afford it, don’t have it. Go for what you can afford and don’t just think of today, think about the future and the variables in the economy and job market. I bought my car on zero percent finance but I only did so because I actually had saved the full amount already so knew I could pay it off at any time if necessary and while it’s sitting in the bank it’s gaining interest, albeit not a lot at the moment. How have we got to a position where people can’t think for themselves. If they default on their payments and the cars are repossessed then it’s their own fault not the finance companies and let’s face it someone who is responsible is going to get a bargain on the repossessed car website, where you pay a lot less than its actual value. Live within your means and if you’re sensible you will be able to afford a better car eventually. Just be patient. Perhaps its time to bring economics back as a GCSE exam and make it compulsory. Unfortunately sensible people are always penalized by the irresponsible because if it gets to be a big problem this great scheme will be taken away.
I think the real problem here is (a), finance is far too readily available, (b), everybody wants what the next door neighbour has, and, (c), when we hear the mantra put out by the likes of John McDonnell, that borrowing and spending what you don’t have is acceptable. The reason we now have austerity, is because previous Governments have borrowed, often irresponsibly, without a thought of how they will eventually ‘balance the books’, and this culture of ‘living on the never never’ has filtered down to the man in the street, and become a lifestyle.
oh do go and preach your tory values elsewhere, the reason we are still in austerity (after 8 years of tory rule) is because its a political decision, not a necessity, its to appease people like you….now go away and feel good about yourself that you’ve made the poorest in our society even poorer…well done
Yes. I buy almost everything on credit, but know that I can pay back all of it each month, thus paying no interest. It’s convenient, and means that I can at least get some interest on my money.
I don’t believe that is a fair comment Julie.
Circumstances are different for everyone and sometimes a car purchase cannot be delayed i.e car crash,major break down , new job and if savings are insufficient there is no choice.
I believe there are a number of people around who are not in such a fortunate position as yourself and are not in the privileged position to have savings in the bank but can afford the monthly repayment at current interest rates.
I understand what you are saying but you can get a cheap used car that’s decent quickly. I’ve never owned a new car when I was young I used to look at nice new cars and think wow they must have money now if I see someone in a new car there’s a 9 in 10 chance they don’t actually own it and have less money because of the huge monthly payments they are throwing away
Car loans or PCPs are now a vicious circle. if people can no longer afford them then the car industry will stall with sales down not just 10% but 50% or more. So lay-offs in car manufacturing, etc. PCP should be stopped completely or called what it really is, Car Hire with the option to buy. PCP means the person never owns an asset but just writes of the money every month. Direct loans should be restricted to 60% of the value and be repaid over a maximum of 3 years. Car manufacturers should reduce their UK prices so that they are the same as US or Other countries prices. In the UK they do rip us off. When I bought by Land Rover Discoverty Sport the US price included special paint (£ 600 extra in UK) and more and the base price was the same as that in the UK by numbers except the sign was US$ not £, which meant a 30% difference before either VAT or US State tax. Never mind the shipping costs.
If not curtailed we are in for one masive recession, worse than 1928 – 33.
Over years, people have been allowed, encouraged even, to have what they want when they want it. That gets votes. Personal debt has never been higher, much of it poorly secured or not secured at all. Governments could legislate this out if they wanted to, but they need or want the money in the economy. As for the borrowers, well advice and common sense is out there. If they just go ahead and borrow and get in to financial trouble that has to be their problem. Short of legislation it cant be stopped.
The only sensible way to finance any depreciating asset is 100% down, followed by £0.00 per month, forever.
I find it astounding that such a huge proportion of car buyers don’t seem to recognise that a car is merely a metal box on 4 wheels intended to do no more than get you from A to B. Nothing at all to do with “status”. Hence although we choose to have 3 cars, for practical usage reasons, we’ve had one for 5 years, one for 13 years, one for 9 years (altho in the family for 16 years), and always ensure we have sufficient off road parking, so no abuse to the pavement, ( with reference to later article). They go, with little more than regular maintenance costs & serve their purpose.
I’d like to know just what some of the companies actually mean when they state on the advert you can’t buy the car but must take out the finance plan
I also think too many people are leasing new cars, often (particularly with the younger generation) to show off to friends. I have personally seen this a lot in the last couple of years. Unfortunately, If they lose their job, or their hours are cut or, even because of illness or accident, they are unable to keep up the payments, they are then in a very similar position. It is all down to the “I want it and I want it now” culture, and they seem unable to foresee any consequences if financial problems arise
Is it any wonder when a garage says it okay for the agreement signatory to change the V5 into their sons name, then your son insure it and be the main driver?? The finance would not allow this and the garage obviously are aware of there regulations. The finance company only agree to the finance on the stipulation that the signatory is the main driver and insurer of the car.
So what are my legal rights?
I see a big problem looming if interest rates rise. I understand over 80% of private new cars are on PCP and if interest rates rise will those people be able to afford their next car, it will come as a shock if after driving say a Mercedes they have to look at Kia’s etc, PCPs also mean the secondhand market is full of the sorts of cars most secondhand buyers don’t want.
My dad bought a new Honda a couple of years ago and after negotiating a deal was told he would get another £500 off for taking finance he asked if he could cancel it and they said within 14 days he did it then went back the next day cancelled it and paid the full amount. There should be no encouragement to take our finance.
Well that’s good….car finance advert at the foot of the article ! Maybe if lenders dropped the extortionate rates and reduced the size of loans offered to people who are vulnerable, the failure rates would drop.