Car Leasing News - The parties over! Is the car financing bubble about to burst?

Car leasing newsA recent article in The Observer, suggests that fears are growing about an increase in personal debt problems and an imminent correction in the value of used cars. The article said that 85% of new cars are financed using loans, some of which have been offered to people unable to repay their loans, and since the car leasing lacks industry-wide figures for arrears and defaults the it is difficult to get an accurate picture on the scale of the problem.

Personal Contract Purchase loans allow customers to hand back their cars if they are unable to pay, shifting the risk for falling car prices onto lenders and lease companies.

The article indicated that MPs and debt charities have called on the car leasing industry to reveal the number of people in arrears and defaulting on loans, amid fears that consumer lending is returning to levels seen before the 2008 financial crash.

More than 85% of new cars in the UK are financed using loans – up from just over half in 2009 – but a lack of industry-wide figures sets car leasing apart from other sectors in the financial services industry that publish figures for arrears and defaults.

The MPs said they were concerned that the car leasing industry could not publish figures on the level of sub-prime lending to people with low incomes or who have poor credit histories.

Last week the Bank of England said it was concerned about rising consumer debt, warning that this posed a risk to the stability of the banking sector.

In its financial stability report, the central bank, which is the main regulator for the financial services industry, said that over the past 10 years the banking sector’s total write-offs on consumer credit were 10 times higher than on mortgages, and that figure was likely to increase should the UK suffer an economic downturn.

The Bank forced high street lenders to set aside an extra £11bn to protect themselves against a rise in defaults. However, the Bank was unable to publish figures about the level of distress among car leasing customers in its report or estimate the potential for a rise in defaults.
Total car registrations were 30% higher in 2016 than in 2012, mainly due to ultra-cheap “personal contract purchase (PCP)” leasing agreements.

Jim Howard, Managing Director of Vehicle Save Contract Hire and Leasing (pictured), explained; “As a company Vehicle Save believe that a continuation of the growing number of registrations is unsustainable, and we expect there to be a correction in used car prices very soon as a glut of the new registrations from three years ago, the average length of lease contract, come back on to the market.”

Jim Howard Vehicle SaveHe added; “The secret of running a profitable car leasing company, is the ability of being able to predict the future value of a used cars so we know what level of depreciation we are to finance over the term of the contract. We have factored the existing level of uncertainty into our estimated resale price of the vehicles we have leased. 

It costs us as a company when we have clients who default on their agreements, so we are careful about whom we extend our credit lines to. In fact because we take such a personal approach to credit checking, we can sometimes lend to people who might not pass a traditional credit check when we understand their financial situation.”

Howard concluded; “We know that not all lenders are like us, as some take risks in order to exploit the sub prime market, but we don’t play that game and have prepared our business for an uncertain future as this issue plays out”