Increase in car finance is unlikely to cause credit crunch despite Bank of England fears

File photo dated 05/01/17 of new cars in a compound near Sheerness in Kent as as new car sales reached a 12-year high in January, according to an industry trade association.

The Bank of England has said it is worried that the current increase in people taking out car leases could cause an economic collapse.

However, this has been strongly denied by the automotive industry. According to The Telegraph, those within the industry have rebuked claims that the constant rise in people borrowing to finance a car is going to dramatically affect the economy – especially in personal contract plans (PCPs).

George Galliers, an auto industry analyst, told the newspaper: "The industry is conservative, manufacturers offering PCPs look at what the value of the car is likely to be at the end of the PCP and offer something lower.

"Say they think it will be worth £12,000, then they say it is £10,000. It gives them a 'buffer' against a fall in car prices.

"My view is that PCPs are not going to be the cause of the next credit crunch."

However, the Bank of England's financial stability report noted that there has been a huge surge in consumer credit since 2012, with finance on cars now making up a staggering 29 per cent of its £198bn total.

Of that total £58bn in car finance, the banks hold more than £24bn of it with the remaining £34bn being held by the manufacturers themselves. That means a bulk of the finance is actually not held within the banks but rather the car companies themselves.

According to the Bank's governor, Mark Carney, the main fear is that if the prices of used cars drop by more than 30 per cent, it could see thousands of motorists having to hand back the keys to their cars due to the fall in the value of the PCP or leased car they are driving.

Editor in chief of Car Dealer magazine, James Baggott, told the Telegraph: "Manufacturers work hard to set realistic residual values for cars so there is unlikely to be a drop because they are inflated.

"This means that people on PCPs effectively have a savings account by paying a little more each month than needed to cover the depreciation so they build up equity - that can only be a good thing."

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