Negative media coverage of car finance has picked up again over the past few weeks, with many articles in the national press and, last night, a Channel 4 Dispatches’ programme, Secrets of Your New Car.
Some of the more dramatic headlines have included the Sun’s “Is car loans bubble set to burst?”, the Daily Mail’s “Slowing sales fuel fears over risky vehicle finance deals”, and the Daily Telegraph’s “Diesel drivers face ‘negative equity time bomb’”.
Dispatches used undercover filming in dealerships and an interview with a former dealer salesman to “expose questionable sales tactics and confusing advice”.
In this second Asset Finance International (AFI) review of the key claims and the facts behind them (the first from May is here) we again ask “do the stories have substance or is this ‘fake news’?”.
Claim: “Car loans are a reason for the growing credit bubble in the UK”.
AFI fact check: Ten years ago, around half of new car sales came with dealer-arranged finance. Now almost nine in 10 have point of sale finance and this has been reported as a surge in dealership car finance. This is broadly accurate, but it’s important to remember that, previously, there was far wider use of credit cards, unsecured personal loans and second charge mortgages to fund cars. The overall increase in car finance across all consumer credit products isn’t reported and is difficult to estimate, but it is safe to say that car finance is far less of a contributor to any growing credit bubble in the UK than the analysis in the media has suggested.
Claim: “Irresponsible lending is leading to increasing numbers of people defaulting”.
AFI fact check: There’s no indication in the market of a general increase in defaults. If there is an issue with higher defaults and alleged irresponsible lending - which isn’t clear - it’s likely to be confined to the sub-prime segment. There are now at least 20 small sub-prime lenders, all non-banks and all very small firms compared to the leading motor finance companies. For example, Black Horse is over 400 times the size of The Car Finance Company, a sub-prime specialist that has been the subject of several recent national press articles and reported to be the largest sub-prime player. Overall, sub-prime accounts for only a few percentage points of the motor finance market.
Claim: “PCP plans allow customers with poor credit histories to buy new cars”.
AFI fact check: PCP is nothing new, having been launched by Ford 25 years ago in 1992, closely followed by other manufacturers. The recent growth in PCP take-up reflects decisions taken by manufacturers to support car sales through a combination of zero or low interest rates, and reduced deposits. This has helped convert customers from other forms of consumer credit to dealer-introduced finance, rather than attracting customers with weaker credit records. What is new is the growth of PCP options from non-captive car firms, which may be available to a wider range of customers, including near-prime, but still not those with poor credit histories.
Claim: “Diesel car drivers could find themselves trapped in finance deals they cannot afford”.
AFI fact check: In our first AFI fact check in May we dealt with the residual value risk to lenders from PCP (it’s potentially significant for the car companies, but not enough to pose a threat to banks or economic stability - a conclusion in line with recent Bank of England analysis). The “negative equity time bomb” claim for diesel drivers using PCP seems entirely contradictory to how PCP works, as it is the lenders that must take the hit if diesel car prices fall, not the drivers. The Daily Telegraph did qualify its headline by saying that drivers will only have problems if they want to hand back cars early. Under consumer credit rules, penalty-free early terminations are allowed after the consumer has repaid 50% of the total amount payable, which includes the optional final lump sum payment on a PCP. The higher the final payment, the lower the monthly payments, and the later the penalty-free early termination. So, there is some truth to the story if, with the benefit of hindsight, final payments for diesel cars have been set higher than they might have been. This is unlikely to be of concern to most diesel drivers who will be happy to have transferred the residual value risk to the lender. Even if early termination rights don’t help, under FCA rules the lenders will still be required to treat customers in default or arrears with ‘forbearance and due consideration’.
Claim: “Sales staff don’t mention leasing options”.
AFI fact check: Last night’s Dispatches programme included an interview with a former car dealer salesman who has been out of the industry for some time, a compliance consultant from an unnamed firm, and - most tellingly - undercover filming in dealerships. The film showed examples of apparently poor practices in dealers, including how staff explain what happens at the end of a PCP agreement, and cases where staff apparently failed to offer customers available Personal Contract Hire options. There could be explanations for the cases shown. For example, the PCP option might have been the lowest cost due to a promotion. On the surface, however, Dispatches’ evidence confirms the need to ensure customers are made aware of alternative finance options, including lease and the availability of finance from other sources.
* Parts of our AFI fact check are based on information in the newly-published report by Apex Insight, UK Car Dealer Point of Sale Finance 2017.