The Bank of England has confirmed that regulators are looking into further policing Personal Contract Purchase (PCP) car buying deals, as fears that ‘sub-prime’ car loans could put strain on economy growth.
PCP finance deals have become the largest car buying method in recent years, with more than 75% of all UK registrations being completed through such contracts. Despite this, a 2008-style financial crisis will not arise from this increased lending, according to the Finance and Leasing Association (FLA).
An article in The Telegraph reported that regulation is being considered for PCP deals, because increasing numbers of PCP contracts are being drawn up with consumers who cannot afford to fulfil them, similar to the ‘sub-prime' mortgages that caused the financial crisis of 2008.
A spokesman for the FLA said: “The Bank of England is looking to regulate responsibly; it wants to understand the impact on the economy.” However, it quelled fears that PCP loans could put a strain on the economy.
"PCPs are popular because people can afford it more than hire purchase," it said. "For many years, under UK/EU law, every credit deal has had to have affordability checks; they’re mandatory. Basic logic is if any lender wants to lend, it only makes commercial sense if the lender gets its money back.”
If the measures are introduced, a similar set of means and affordability tests would be implemented and the range of cars available to those on lower incomes would therefore be more limited.
The Bank of England’s Financial Policy Committee (FPC) announced after its March policy meeting that levels of consumer credit, which includes PCP contracts, “has been growing particularly rapidly. This could represent a risk to lenders if accompanied by weaker underwriting standards”.
It also announced that it would be more closely monitoring lenders’ assessments before offering the policies.
As new car registrations continue to break new ground in the UK, PCP deals have come to the fore as the main car buying method. Sceptics have doubts about the longevity and sustainability of the growth, as well as the longer-term impact on the used market of the flood of three-year-old used PCP cars, because bigger-selling models depreciate quicker due to the higher number of used examples already on the market.
The Society of Motor Manufacturers & Traders' (SMMT) director of communications and international, Tamzen Isacsson, said: “Finance offers an affordable and flexible way for motorists to buy a new car, with fixed monthly payments and APR that are generally lower than for personal loans. Car finance is governed by very strict rules, and anyone taking out a package will have the terms and conditions explained to them by the dealer and in writing.
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The vast majority of PCP
stumpys182 wrote:
Car sales roles are accredited by the FCA on a non-advisory basis, meaning you are specifically not allowed to steer a customer towards any sort of payment profile. You are required to present the options and allow the customer to make their own decision in their own time.
You have no idea what the customer's real financial position is, so you have no right to tell them that they should be taking more on your finance plan instead of putting down a larger deposit. That is for them to decide based on their own circumstances and desired outcomes. Many people actually prefer to put in more cash and pay less per month (and therefore less interest overall). The money is still going out of their account either way, so the argument that they are "NEVER going to get it back" is irrelevant and misleading.
PCPs create a far more significant negative equity issue than an HP or personal loan during the term, as so little of the loan is being repaid during the term. That makes the situation worse for those people who are desperate or need to settle up early.
If you can do basic maths
But you need to be able to do basic maths to make it work. Many can't.
These days having a nice car and being well off are not intrinsically linked. It's quite levelling really.
Finance is already heavily regulated, but I find it weird you can buy a £50k car on tick without proof of earnings. Maybe more regulation is the answer.
Commercial Private Leasing CPL