The car finance industry could be on the brink of collapse as thousands of consumers risk defaulting on loans because of the coronavirus pandemic.
The stark warning came from one industry expert, who urged the government to offer similar help given to mortgage lenders and called for stricter regulations to stop this happening again.
Stuart Masson, editor of thecarexpert.co.uk, told the PA news agency that the car finance industry had been ‘kicking problems down the road’ because a positive economy meant stretching consumers’ finances had resulted in manageable levels of defaulting.
However, he explained: “The current obsession with PCP [personal contract purchase] car finance for consumers dates back to the scrappage scheme from a decade ago, when people could get a £2,000 deposit for their old banger and drive away in a new car.
“If you follow that, based on a typical three-year finance deal and rolling on into a new car each time, people are now on their third or fourth car.
“The problem is, natural consumer behaviour is that when rolling into a new deal, consumers don’t want to pay more but they want a better car. As competition has grown, manufacturers were trying everything they could to lift the residual value of the car at the end of the agreement, while consumers have seen their equity reducing with each new car. This pushes their finances to the limit without thinking about what happens if the economy takes a hit and they’re out of work for three months.”
Masson claims the industry wasn’t prepared for the pandemic either, as it had been ‘laughing off’ warnings from analysts that large numbers of customers defaulting on agreements could be disastrous, and saying it would take something ‘seismic’ for that to happen. “We’re there now,” he says.
“It’s going to go wrong – it’s just a question of how wrong it’s going to go, how much is it going to cost, and who is going to lose out?”
So what can be done? Masson acknowledges that offering payment holidays for car finance is more complicated than it is for a mortgage, “because a three-month holiday on a 300-month agreement for an appreciating asset is very different to a three-month holiday on a 36-month agreement for a depreciating asset”.
He told the PA news agency: “I know every industry wants the same thing, but it’s got to be on the government to underwrite this. For a lot of households, car payments will be the second-biggest monthly outgoing after their mortgage or rent.
“If people aren’t buried by their mortgage payments they’ll be buried by car repayments instead.”
Longer term, he says tighter affordability regulations are needed to stop people getting into crushing debt.
Masson says proof this needs to happen comes from the fact that premium manufacturers Audi, BMW and Mercedes-Benz are in the top five best-selling brands in the UK, outselling the likes of Vauxhall and Toyota, which is “ridiculous” and “not a normal situation compared with the rest of the world”.
“The reality is that the lenders have to be held responsible for how much they lend and to whom.
#COVID19 : Steeper fall in new car sales than during financial crash. The 44% fall, the steepest in 20 years, shows how important it is our Government backs our world-class Automotive Industry through this crisis. 800,000 jobs depend on it @SMMT https://t.co/SFHBHwVbml
— Jack Dromey MP (@JackDromeyMP) April 7, 2020
“People are happy in their Mercedes-Benz C-Class and their BMW 3-Series, and they don’t want to go back to, say, a Ford Mondeo or Toyota Camry, but it’s not necessarily good for them or for society with everybody carrying a massive amount of debt.
“When the banking crisis happened 10 years ago, the government introduced stricter lending regulations and credit checks to stop the free-wheeling nature of money going to people who couldn’t afford to repay it. The same thing needs to happen in the car industry.”
Adrian Dally, head of motor finance at the Finance and Leasing Association, told the PA news agency in response: “The motor finance industry is of course feeling the effects of the coronavirus disruption, but so too is every part of the economy.
“However, our customers have access to a wide range of consumer protections to help them weather this period until we get back to normal – including payment breaks, reduced payments or interest waivers, and for those who no longer want their cars, voluntary termination allows customers who have paid half of what is owed to hand back the vehicle and walk away with nothing else to pay.
“Customers should be able to choose which cars they want to drive, and as both personal contract purchase and personal contract hire are based on a vehicle’s depreciation over the term of the agreement, cars that hold their value, for instance premium models, are more affordable to the customer.
“Motor finance is a long-established and responsible sector which is looking after its customers now so that everyone is ready to resume business when we return to normal.”
The Financial Conduct Authority said that it had a page on its website dedicated to coronavirus-related issues. It has not issued anything directly related to car finance during the pandemic, but if it does, that’s where it will be found.