pcp finance - are the wheels about to come off?

[jrkitching]

There's a lot of talk in the press right now that pcp vehicle finance deals could trigger the next financial crisis. This is one such article from today's papers.

These deals are unquestionably popular and account for the vast majority of private new car sales. Some say they've brought new cars within the grasp of those who couldn't otherwise afford them; others say they're just another way of trapping the financially naive into years of debt, because they encourage folks who couldn't otherwise afford them to drive cars they can't really afford.

What do you think? Is the availability of accessible new car credit a good thing, or should we be going back to the days when a new car required a 33% deposit and the whole of the balance paid in full within two years?

Is there anyone here who's got into financial difficulties over a pcp and is willing to share their story?

 

[simon_16vpunto]

I have worked in a fiat dealer for the last 6 years as a fiat and abarth specialist.

Using the 500 and punto as an example-
In the last year, I haven't had one single person on an fca pcp, who have come to the end of their agreement who's car is worth anything near the gmfv, and they have all either taken the hit on the negative equity or had to hand the car back to fca.

An example just yesterday, customer come in with a 14 plate 500s, 8500 miles, on a 3 year 8k/ year pcp due up in September. Settlement was just over £6k, car books at around £5k with only one month to go, and 1/3 of the expected mileage. Gmfv was £5800.

I see it every single day with customers

 

[jrkitching]

In the last year, I haven't had one single person on an fca pcp, who have come to the end of their agreement who's car is worth anything near the gmfv, and they have all either taken the hit on the negative equity or had to hand the car back to fca.

I see it every single day with customers

Thank you very much for sharing that.

It seems there is truth behind the headlines.

Is anyone able to comment on how those handing vehicles back to fca are treated with regard to inspections & surcharges?

 

[StevenRB45]

My other half likes them, and tbf I like that she likes as they good for flaky cars you want to hand back at the end of three years when the warranty is done.

She just wants to pay a monthly and drive a car...that's it has no intention of keeping after 3 years.

 

[irc]

It doesn't look particularly good, even allowing for the "it makes a good headline" factor.

But it's not only avoiding the next financial meltdown... hopefully that can be avoided for everyone's sake. Nor just that many people will end up with a car worth a bit less than expected at the end of contract, and have to lower their sights when choosing a replacement.

Government policy on environmental change needs people to keep renewing their cars regularly. People bitten by bad PCP outcomes may choose/have to hold on to their cars for considerably longer. And the take-up of Hybrids and EVs could even stall for a while.

Car companies are addicted to PCP deals and may collapse without them. After all, they have been aiming their model range and sales pitch at PCP buyers for a while now. What will they do when nobody wants (or can afford) most of the cars they make?

We'll probably have a whole new PCP mis-selling scandal, another bunch of parasitic telemarketers chasing to reclaim etc... I'm still blocking calls from PPI leeches.

I do know of people who have PCP-ed unwisely and are stuck in a loop where another PCP deal is effectively the only option they have. On the other hand I know of people who still think it is ideal for them (and it probably is).

I did the maths and read the Ts & Cs and decided it wasn't right for me, mainly because I could be averaging anywhere from 9k to 150k miles per year and I needed flexibility. PCPs or even "normal" leasing didn't work for that. So I was stuck with traditional HP or outright purchase. When I did few miles I kept the car longer. When I did more miles I changed it sooner.

On the plus side, instead of people financing ever bigger and more tech-filled cars, perhaps we will see a move away from the bigger types of vehicles. Bad news for SUV/luxobarge makers, but good for pretty much everyone else.

 

[StevenRB45]

Government policy on environmental change needs people to keep renewing their cars regularly. People bitten by bad PCP outcomes may choose/have to hold on to their cars for considerably longer. And the take-up of Hybrids and EVs could even stall for a while.

Car companies are addicted to PCP deals and may collapse without them. After all, they have been aiming their model range and sales pitch at PCP buyers for a while now. What will they do when nobody wants (or can afford) most of the cars they make?

That's a good point, how many people could afford say a 30k + hybrid without a pcp deal. Only 50% deposit to get the monthly below 400 quid? Bargain!

That the government has created so much uncertainty in the car market I would have severe difficulty justifying to buying a new car with either cash or HP at this point. Seems every new government announcement makes it more certain ice cars are going to be hammered, but electric isn't there yet. Be it road tax, banning them from cities or whatever at some point Ice cars are going to be done. If it's on pcp/lease just hand it back..if you own it..oh dear oh dear. Fairly sure the lease company will have a taken a hit with recent events on our diesel ds3, however the lease company is VW so that's just hilarious. If we owned it on the hand I would be very annoyed.

Then again I keep my cars 6-8 years..so long term policy trends matter more.

 

[AndyRKett]

There's a lot of talk in the press right now that pcp vehicle finance deals could trigger the next financial crisis. This is one such article from today's papers.

A lesson on the daily mail.

Take one potential shock story and recycle over and over till someone else takes notice, after a while if other papers take up the story or add any weigh to the story, shout about how they got there first and saw the problem before anyone else.

http://www.dailymail.co.uk/money/article-4542896/ALEX-BRUMMER-toxic-danger-car-loans.html

http://www.dailymail.co.uk/money/cars/article-4542580/Warning-collapse-30bn-car-loan-debt-deals.html

http://www.dailymail.co.uk/debate/article-4513190/Gleaming-cars-road-spark-financial-crash.html

http://www.dailymail.co.uk/money/ca...ty-watchdog-launches-crackdown-car-loans.html

As the story isn't really picking up they will simply keep banging on about it

Is there anyone here who's got into financial difficulties over a pcp and is willing to share their story?

You sound like you're trying to get a job with the daily mail for extra impact perhaps you need to take some opinions from twitter and post them up?

In all seriousness, as the motor industry it's self has said the problem here is not the deals or the money involved but the media's lack of understanding when it comes to the way the motor industry works.

PCP deals keep the industry propped up with plenty of second hand 3 year old cars that they can sell back to the public on more inflated higher interest finance deals making more money back from the same car.

The car it's self with a screen price of £30,000 have a huge mark up on what the car cost them to manufacture and distribute. So there is a very healthy margin for them to loose a few quid here and there.

Once the car is no longer main dealer fodder it gets auctioned off to the highest bidder into the private market.

The manufacturers can make their money 2 or ever 3 times over on one car before it's no longer any value to them, any losses can be written off against tax, there is no sentimentality from the manufacturers, the aim of the game is to sell as many cars as possible and make a little off every sale. It's not difficult to see where they make that money if for every 100,000 cars sold 90,000 are on a PCP deal at 6.5% per year for 3 years.

A £10k car at 6.5% over 3 years will earn the company about £1000 not to mention the service plans they now push on all new cars, breakdown cover, genuine parts, and insurance services, every new car they sell they make a very tidy profit on, regardless of the final payment at the end.

If the value of cars crashes, then they will simply adjust the interest rate to compensate.

Many years ago when I worked in the industry it was common to offer a trade in value of £xxx against a car worth considerably less, but use that to entice you in, not realising that they simply added a few % to the interest rate to get their money back that way.

 

[irc]

PCP deals keep the industry propped up with plenty of second hand 3 year old cars

Yes, that's possibly a pretty big problem, as there now seems to be many more 3 year old cars than the market can really handle. The economics of PCP do actually need there to be some residual resale value, plus punters to buy them.

Historically, an oversupply of secondhand cars with nowhere to go will reduce the prices that can be got. Good for some. Not so good for most. And it tends to poison the new car market as well.

I can picture a fair size chunk of the current PCP demographic thinking "Why buy a new car if I can get a 3 year old one for less than 20% of the price?"

Pumping up the screen price to counteract reduced residuals has held things together while interest rates were really low.
But the fundamental plan of offering yet more finance to more people who can't really afford it doesnt seem to be working out too well, and is likely to be more of a problem when interest rates eventually rise. That's basically what broke the financial system last time round...

I haven't even seen (let alone opened) a Daily Mail in 20+ years, so I couldn't really comment on what they have been saying, but simply from a mathematical perspective, it is quite likely that there are bumps in the road ahead.

Negative Equity is still a painful memory for many. But the attraction of something bright and shiny may have been enough to make some forget the lesson until it is too late.

 

[jrkitching]

I haven't even seen (let alone opened) a Daily Mail in 20+ years

You can read about it in the Guardian instead (or pretty much anywhere else for that matter).

The problem from an economic perspective is that these loans are being securitised and sold on as CDO's to pension companies and the like, often with a triple A rating. The reality is that the negative equity implicit in most pcp deals for the majority of the term means that a significant portion of the lending is effectively unsecured. According to the Guardian article, £31.6 billion was outstanding in UK car loans in 2016; nobody really knows how much of that is subprime.

If this sounds familiar, it's because it is; this is precisely how the 2008 banking crisis came about after financial institutions sold tranches of consolidated securitised mortgages containing a significant subprime content, which then defaulted.

 

[irc]

jrkitching Absolutely right.

Thats why the disappearing residuals is a big problem.

Car companies are obviously keen to sell more cars, but too many people seem to have too much on various forms of credit to be safe if interest rates rise.

Last time round many people were desperate to hand back cars so they didn't have to default on mortgage payments. And the percentage on PCPs was much lower then. As was the amount owed, I suspect.

(PS: Not sure I've read the Guardian for a decade or so either...)

 

[AndyRKett]

Ok here is how they make the money, they sell you. £20k car on a finance (pcp deal) you put down a few hundred quid and they give you a car, the car is worth maybe £12-15k to the manufacturer and they sign you up to their own finance company, the bank of fiat or Ford or whoever. Now you've agreed to pay £20k for a car that is only worth £15k at the end of your 3 years the final guaranteed value is £5k.

So you pay for 3 years for your car and at the end the car is only worth £4K but you still owe £5k you take out a new deal and buy a new car, but over the last 3 years you've paid £2-3k more in interest. So now the manufacturer has £2-3k profit plus your old car. Which they sell, on another PCP or finance deal to someone else. They make more interest, they sell you and the next buyer a service package, they sell you their own brand of insurance and they lump on some break down cover. They sell you GAP insurance and alloy wheel cover the list goes on.

By the end of the cars useful (to the dealer) life the car has earned them twice what it was worth to them to begin with and they auction off its carcass to the private car dealers and make another few quid at the end.

They have been doing this for years, they know how many used cars they need and they know how many new cars they will sell, they are pretty good at adjusting the prices appropriately. Companies like mini will produce a very large number of 2-3 month old cars to be sold to the dealer network just to prop up the number of used cars they have available as demand is so high, they have staff who will have a car for less than 5k miles then swap it for the next car.

The best situation for the manufacturers is that the car IS in negative equity and it keeps the machine rolling people keep buying new.

All you've highlighted is the lack of understanding of how the motor industry works and how people are easily pulled in by a media story.

 

[irc]

My apologies. I did not realise you are an economist and financial instrument expert, and, of course, I defer to your expertise in the matter.
I am completely reassured that all will continue smoothly as now, and there will be no consequence to the current over-extension of personal debt at a time when interest rates can only rise.
Being only a humble mathematician the situation seems to be beyond my understanding.
So, you heard it here first... no problems on the horizon.

 

[jrkitching]

So you pay for 3 years for your car...

The system depends on the vast majority of people making the payments they've contractually agreed to. Once a significant number default, it gets ugly quite quickly.

The system also depends on most cars being traded into the dealerships at or before the end of the pcp term. Whilst that used to be the norm, there are signs (as Simon's post confirms) that it's no longer the case. Every time the finance company have to take back a car that nets less at auction than the GFV less any surcharges, they're writing off money.

The systemic problem is that manufactuers are increasingly decoupling the financing from the manufacturing by collateralising the debt and selling it on, together with the associated risk.

It's the owners of the collateralised securities that take the hit; that's the banks, pension funds and other financial institutions. The manufacturers and dealers took the profits long before that.

 

[AndyRKett]

My apologies. I did not realise you are an economist and financial instrument expert, and, of course, I defer to your expertise in the matter.

Being only a humble mathematician the situation seems to be beyond my understanding.

So you're not a economist or financial instrument expert either...

What we have here is a system that has been operating without issues for the last 20 years or so with no problems and has already gone through one serious financial crash without any significant issues, versus the doom and gloom media who like to run a story to try and keep people reading papers.

If you bothered to read above I had not replied to anything you've said and truth be told I've not read anything you've said (before me quoting you now), what I was replying to was the original post which linked to a daily mail article.

 

[AndyRKett]

The system depends on the vast majority of people making the payments they've contractually agreed to. Once a significant number default, it gets ugly quite quickly.

The system also depends on most cars being traded into the dealerships at or before the end of the pcp term. Whilst that used to be the norm, there are signs (as Simon's post confirms) that it's no longer the case. Every time the finance company have to take back a car that nets less at auction than the GFV less any surcharges, they're writing off money.

The systemic problem is that manufactuers are increasingly decoupling the financing from the manufacturing by collateralising the debt and selling it on, together with the associated risk.

It's the owners of the collateralised securities that take the hit; that's the banks, pension funds and other financial institutions. The manufacturers and dealers took the profits long before that.

The vast majority of people do and have always paid their bill or the system would have collapsed long before now.

Rather than just reading the headline grabbing articles written by the press who spin the situation as "causing the next financial crash" try reading some of the articles these are based off, that only highlight that the industry would be vulnerable in the event of a financial crash.

 

[irc]

What we have here is a system that has been operating without issues for the last 20 years or so with no problems and has already gone through one serious financial crash without any significant issues,

You are quite correct, except that PCP was a much smaller percentage of car finance at the time of the last crash, and has been increasing dramatically since then.

versus the doom and gloom media who like to run a story to try and keep people reading papers.

Again, true, except I, personally, haven't read any of them.
My sources were from financial data instructions related to the calculation of Bank Credit Exposure and the regulatory procedures that financial institutions are required to undertake, and, for example, the Bank Of England's Credit Conditions Review (2016 Q3), which I believe is available to the public. It's only really a summary, but it's quite informative. The backing figures for it would be restricted.

If you bothered to read above I had not replied to anything you've said and truth be told I've not read anything you've said (before me quoting you now), what I was replying to was the original post which linked to a daily mail article.

I did bother to read above, and having seen the link, I had assumed that the poster had already read the article (which I hadn't, and probably never will), but as it was based on press releases from the BOE and also their quarterly credit analyses I didn't see much point when I could read the source material. As I said, I fully understand the mathematical constructs, but I was having a problem with the posted interpretation of them.

The points I made related to
a) the significant increase in PCP finance since the last time the financial markets were stressed, (PCP about 30% of dealership finance in 2000, about 75% now)
b) that the PCP type of finance appears to be less controlled than traditional finance. Therefore, it seems likely that more unsuitable customers will be approved for finance they can barely afford
c) the financial product itself is sensitive to the residual price.
d) personal debt profile
All of these are factors which should perhaps cause concern.

At least according to the Bank Of England. In their own words (and figures, and graphs). They have apparently been considering bringing PCP diligence up to the same level as normal household finance. I expect some will be surprised/shocked that it isn't already.
Perhaps that will rein things in a bit and avoid problems with defaults in future should there be an interest rate increase.

(They do have some pretty good mathematicians working there. Theoretically they also have some good economists too, but I guess we'll see about that)

 

[jrkitching]

try reading some of the articles these are based off

“Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions.”

In car finance, Personal Contract Purchase (PCP) plans now finance almost four in five new car purchases, having accounted for one in five in 2006. Arrears rates are lower than on other forms of consumer credit, and unlike credit cards or personal loans, the lenders are predominantly the finance arms of car companies. Losses to those companies – however painful for them – are much less significant for the wider economy than losses at banks.

“Nevertheless, the banks that are involved, as well as the shareholders of car companies, will want to think very carefully about the risks” Alex says. He explains how, even if a borrower makes all the monthly payments on a PCP contract, the lender can still lose money if used car prices fall. “The advent of PCP means – as the small print always says – the past may not be a good guide to the future.”

...from a speech given at the University of Liverpool’s Institute for Risk and Uncertainty 6 days ago by Alex Brazier, the Bank of England's Executive Director, Financial Stability Strategy & Risk, and a member of the Financial Policy Committee.

What we have here is a system that has been operating without issues for the last 20 years or so with no problems.

and to quote Alex Brazier again, "the past may not be a good guide to the future".

I've no idea whether what's currently circulating in the press and elsewhere is overhyped drama, or the first signs of changes which will affect anyone buying a new car on finance. That's why I started this thread, to get some input from the real world about what's actually happening out there. It's why posts like Simon's are so valuable, because that's real world input about something on the ground that's different this year from what was happening in the past.

Personally I don't think car pcp deals are going to trigger an economic crash in the UK, but I do think folks buying cars this way are going to notice some changes, not all of which will be for the better.

For example, a lot has been said recently about how buying a car on a pcp can make it harder to get other forms of credit (esp. mortgages & new credit cards). Has anyone here experienced this?

 

[AndyRKett]

Personally I don't think car pcp deals are going to trigger an economic crash in the UK,

Which is basically what I've been saying......... [emoji849]

 

[Gavv8]

Rich pickings in the used car sector though if your a cash buyer.

 

[Parabolica]

A very interesting thread and it seems to me that PCP's have an influence with regard to another thread on this forum about the "design life" of cars.
Why bother to design a car to last well, perform reliably and look undated when your ideal customer is, from day one of ownership, already being set up to sign on the dotted line for the next model at the end of the PCP agreement?