Are the wheels about to fall of car finance?
Discussion
daemon said:
KarlMac said:
BigLion said:
Skynews article saying car finance could go pear shaped...86% of cars bought on finance and the big hope is that cars will be worth more than their GFV otherwise problems could arise in the finance arms.
Isnt this literally the exact same pattern as Mortgage bonds/CDO market? How can lenders not see this coming? Or don't they care?Theres little risk to the finance company and little risk to the purchaser (?) as they can hand the car back and move on to the next, best deal from a manufacturer / finance company / leasing company wanting to gain market share.
The reason they are worried about repos rising in the US is that there are tens of millions of sub-prime borrowers who aren't just exposed to car debt but have a host of other debts also and as the costs of servicing all those debts starts to creep up they simply cannot handle the cost increase and capitulate on all their loan types.
Those people won't then be borrowing to get the next car as they're already about as low as they can go and after such a default they won't even be able to get a loan from the drug dealer on the corner.
When UK rates start to rise we'll also see the same sort of thing as very large numbers of people who borrow for cars also borrow for houses, holidays, clothes, everything but I don't think that even in the worst corners of debt consumption in the UK it is any kind of match for the insanity across the whole of the US.
DonkeyApple said:
Yup. I don't see any direct risk to the buyer but what they are talking about in the US is a massive spike in repos on one side of the market that will demolish values and on the other side the bond values collapsing which if they have been bought by the institutions on margin could lead to margin calls that cannot be met and a collapse in the other side of the market.
The reason they are worried about repos rising in the US is that there are tens of millions of sub-prime borrowers who aren't just exposed to car debt but have a host of other debts also and as the costs of servicing all those debts starts to creep up they simply cannot handle the cost increase and capitulate on all their loan types.
Those people won't then be borrowing to get the next car as they're already about as low as they can go and after such a default they won't even be able to get a loan from the drug dealer on the corner.
When UK rates start to rise we'll also see the same sort of thing as very large numbers of people who borrow for cars also borrow for houses, holidays, clothes, everything but I don't think that even in the worst corners of debt consumption in the UK it is any kind of match for the insanity across the whole of the US.
Interest rates would have to rise dramatically here over a sustained period before we'd see that here. Particularly with Brexit coming thats unlikely to happen any time soon.The reason they are worried about repos rising in the US is that there are tens of millions of sub-prime borrowers who aren't just exposed to car debt but have a host of other debts also and as the costs of servicing all those debts starts to creep up they simply cannot handle the cost increase and capitulate on all their loan types.
Those people won't then be borrowing to get the next car as they're already about as low as they can go and after such a default they won't even be able to get a loan from the drug dealer on the corner.
When UK rates start to rise we'll also see the same sort of thing as very large numbers of people who borrow for cars also borrow for houses, holidays, clothes, everything but I don't think that even in the worst corners of debt consumption in the UK it is any kind of match for the insanity across the whole of the US.
Even back in 2007 / 2008 i dont recall there being mass repos - moreso that people just handed their cars back at the end of term / VT'd, making it the finance companys problem.
KarlMac said:
BigLion said:
Skynews article saying car finance could go pear shaped...86% of cars bought on finance and the big hope is that cars will be worth more than their GFV otherwise problems could arise in the finance arms.
Isnt this literally the exact same pattern as Mortgage bonds/CDO market? How can lenders not see this coming? Or don't they care?
Obviously not going to have the same impact as mortgages etc. but I can see some of the finance houses are going to get their fingers burnt as some of the assumptions being used in future pricing expectations are optimistic apparently...
daemon said:
Interest rates would have to rise dramatically here over a sustained period before we'd see that here. Particularly with Brexit coming thats unlikely to happen any time soon.
Even back in 2007 / 2008 i dont recall there being mass repos - moreso that people just handed their cars back at the end of term / VT'd, making it the finance companys problem.
Don't forget that the worst borrowers pay an enormous premium for their debt so a 25bp rise could easily translate into a 2-10%+ rise for the 'sub-prime' consumer. Even back in 2007 / 2008 i dont recall there being mass repos - moreso that people just handed their cars back at the end of term / VT'd, making it the finance companys problem.
For a good borrower there are likely to be quality lenders who swallow that 25bp to try and gain market share but beyond that type of consumer the real rise to them will be big.
Also, don't forget that back in 2008 it was a false market as the Govt stepped in and dropped rates to the floor as mortgage arrears were growing and instructed the lenders to not forclose. There is absolutely no comparison between what happened in 2008 and what will happen in a normal correction if the banks don't require bailing out.
2008 saw the prevention of market forces. The recent period of deleveraging the housing market should ensure that no such intervention will occur next time around and that those unable to cover their obligations will be left to burn as should always happen.
I agree re hand-backs. That's why I don't think this is a direct risk within the uk market but where the risk lies here is a sudden fall in the purchasing power of the consumer as the cost of debt rises.
Venturist said:
funkyrobot said:
Had an email the other day from my ISA provider. My savings interest rate is dropping again, from .8% to .5% (it's been dropping a lot over the last three years).
I keep an ISA as a safety net. It would be nice if it actually earned some decent interest.
Unfortunately, it seems that people like me who try to be careful with money are in the minority and we ultimately lose out.
"Lose out"?I keep an ISA as a safety net. It would be nice if it actually earned some decent interest.
Unfortunately, it seems that people like me who try to be careful with money are in the minority and we ultimately lose out.
What you're losing out on is the potential rewards that can be generated from risk-taking. Remember you're also "losing out" on the potential costs, too.
DonkeyApple said:
I agree re hand-backs. That's why I don't think this is a direct risk within the uk market but where the risk lies here is a sudden fall in the purchasing power of the consumer as the cost of debt rises.
Thats a risk for the manufacturers and their finance companies though isnt it?If the Jones next door cant get a £45K PCP deal for their next 520d M Sport then they'll have to slum it in something lesser - to the detriment of BMWs market share perhaps.
I also think the new car tax regime will have an impact - this country seems obsessed with "cheap road tax" so the thought of paying £150 more pa will put people off a north of £40K purchase.
I think that will also hit the likes of BMW / Mercedes hard too - most of their mainstream metal seems to breach the £40K list price threshold.
DonkeyApple said:
When UK rates start to rise we'll also see the same sort of thing as very large numbers of people who borrow for cars also borrow for houses, holidays, clothes, everything but I don't think that even in the worst corners of debt consumption in the UK it is any kind of match for the insanity across the whole of the US.
PCP's and HP rates have stayed quite high in the UK. Generally about 6% APR on new cars and nearer 10% APR on used, which is consistent with the pre-2008 position and wider rates for unsecured loans. The 0% finance deals are basically just a re-allocation of discount.
I'm not convinced we are going to see significant rate rises.
DonkeyApple said:
daemon said:
Interest rates would have to rise dramatically here over a sustained period before we'd see that here. Particularly with Brexit coming thats unlikely to happen any time soon.
Even back in 2007 / 2008 i dont recall there being mass repos - moreso that people just handed their cars back at the end of term / VT'd, making it the finance companys problem.
Don't forget that the worst borrowers pay an enormous premium for their debt so a 25bp rise could easily translate into a 2-10%+ rise for the 'sub-prime' consumer. Even back in 2007 / 2008 i dont recall there being mass repos - moreso that people just handed their cars back at the end of term / VT'd, making it the finance companys problem.
For a good borrower there are likely to be quality lenders who swallow that 25bp to try and gain market share but beyond that type of consumer the real rise to them will be big.
Also, don't forget that back in 2008 it was a false market as the Govt stepped in and dropped rates to the floor as mortgage arrears were growing and instructed the lenders to not forclose. There is absolutely no comparison between what happened in 2008 and what will happen in a normal correction if the banks don't require bailing out.
2008 saw the prevention of market forces. The recent period of deleveraging the housing market should ensure that no such intervention will occur next time around and that those unable to cover their obligations will be left to burn as should always happen.
I agree re hand-backs. That's why I don't think this is a direct risk within the uk market but where the risk lies here is a sudden fall in the purchasing power of the consumer as the cost of debt rises.
The manufacturer/finance work like a charity for the punter and will never pass on costs!
daemon said:
DonkeyApple said:
I agree re hand-backs. That's why I don't think this is a direct risk within the uk market but where the risk lies here is a sudden fall in the purchasing power of the consumer as the cost of debt rises.
Thats a risk for the manufacturers and their finance companies though isnt it?If the Jones next door cant get a £45K PCP deal for their next 520d M Sport then they'll have to slum it in something lesser - to the detriment of BMWs market share perhaps.
I also think the new car tax regime will have an impact - this country seems obsessed with "cheap road tax" so the thought of paying £150 more pa will put people off a north of £40K purchase.
I think that will also hit the likes of BMW / Mercedes hard too - most of their mainstream metal seems to breach the £40K list price threshold.
The real key is in noticing just how big a premium over market low rated borrowers pay and that while the minority will see little impact from small rate rises the low credit risk consumers will see massive hikes on their costs and their spending will dry up.
Elysium said:
PCP's and HP rates have stayed quite high in the UK. Generally about 6% APR on new cars and nearer 10% APR on used, which is consistent with the pre-2008 position and wider rates for unsecured loans.
The 0% finance deals are basically just a re-allocation of discount.
I'm not convinced we are going to see significant rate rises.
Once BofE starts raising it will be passed on. A 25bp rise usually means at least 1 whole % on retail debt costs but for the bottom end of borrowers it's a lot more. The 0% finance deals are basically just a re-allocation of discount.
I'm not convinced we are going to see significant rate rises.
Then there is the perceived rate of change and if like the US you start to have predictions of three hikes in a year then obviously longer term debt starts to factor that in and rises even more in advance.
Then what you see is consumers not being able to buy sofas, TVs, cars and a huge slowdown in the key consumer sectors.
Car lenders may dealers may swallow the first hike or two for their solvent customers due to a competitive battle to try and win a shrinking client pool but that would only last a short while.
What is scaring the US at the moment is that their percentage of junk level consumers is massive compared to ours and car debt is just the tip of the iceberg and a rapid rise in the cost of consumer debt will see millions defaulting on rent and property debt.
Where we differ is that we have far fewer of these types and in the last few years the Govt has taken a whole raft of actions to wind in their behaviour and exposure so that when we follow the US the impact is far less. We've had strong changes to mortgage and BTL lending, a big review under way on consumer debt to reign that in and only today the issue of credit card debt has been kicked off. Love or hate this Govt they are the only Govt in 30 years to start bringing consumer debt under control.
The real problem facing the UK is probably longer term in that our excess consumption through borrowing means very few people have the means to pay for themselves once they stop working.
Edited by DonkeyApple on Monday 3rd April 20:40
daemon said:
I think that will also hit the likes of BMW / Mercedes hard too - most of their mainstream metal seems to breach the £40K list price threshold.
Not so sure - most 1 Series as well as the inevitable 320d are well under 30 grand.Perhaps it's time manufacturers wound back car production?
daemon said:
I also think the new car tax regime will have an impact - this country seems obsessed with "cheap road tax" so the thought of paying £150 more pa will put people off a north of £40K purchase.
I think that will also hit the likes of BMW / Mercedes hard too - most of their mainstream metal seems to breach the £40K list price threshold.
It's more than an extra £150pa. A C220d AMG Line with a Premium Pack and metallic paint (pretty much the default spec) last week was £0 for first year rate, thereafter £20.I think that will also hit the likes of BMW / Mercedes hard too - most of their mainstream metal seems to breach the £40K list price threshold.
Now, due to the P11D value exceeding £40k, the same car is £160 for first year and £450pa thereafter (the flat rate £140 plus the £310 premium for costing over £40k), so over a 36/48 month PCP term that's gone from £40/£60 VED cost respectively to £1,060/£1,510, a mere 2,400% increase.
With that and the recent bad press in respect of NOx emissions etc, people are shying away from them in droves - into C200 petrols, which helpfully fall just under the threshold, spec for spec and residuals just announced for Q2 have proportionally increased for mainstream petrol engines and diesel ones have taken a bit of a dip, so the monthlies are overall pretty close, the extra monthly cost of tax renewals swinging the balance back to petrol...
DonkeyApple said:
Elysium said:
PCP's and HP rates have stayed quite high in the UK. Generally about 6% APR on new cars and nearer 10% APR on used, which is consistent with the pre-2008 position and wider rates for unsecured loans.
The 0% finance deals are basically just a re-allocation of discount.
I'm not convinced we are going to see significant rate rises.
Once BofE starts raising it will be passed on. A 25bp rise usually means at least 1 whole % on retail debt costs but for the bottom end of borrowers it's a lot more. The 0% finance deals are basically just a re-allocation of discount.
I'm not convinced we are going to see significant rate rises.
Then there is the perceived rate of change and if like the US you start to have predictions of three hikes in a year then obviously longer term debt starts to factor that in and rises even more in advance.
Then what you see is consumers not being able to buy sofas, TVs, cars and a huge slowdown in the key consumer sectors.
Car lenders may dealers may swallow the first hike or two for their solvent customers due to a competitive battle to try and win a shrinking client pool but that would only last a short while.
What is scaring the US at the moment is that their percentage of junk level consumers is massive compared to ours and car debt is just the tip of the iceberg and a rapid rise in the cost of consumer debt will see millions defaulting on rent and property debt.
Where we differ is that we have far fewer of these types and in the last few years the Govt has taken a whole raft of actions to wind in their behaviour and exposure so that when we follow the US the impact is far less. We've had strong changes to mortgage and BTL lending, a big review under way on consumer debt to reign that in and only today the issue of credit card debt has been kicked off. Love or hate this Govt they are the only Govt in 30 years to start bringing consumer debt under control.
The real problem facing the UK is probably longer term in that our excess consumption through borrowing means very few people have the means to pay for themselves once they stop working.
The base rate and economy were in massively different places when I made these purchases, but personal loans and car finance have stayed quite constant.
Elysium said:
I'm not sure. I bought a car in 2006 with a 6% APR PCP deal. The rate was the same for my last car in 2014.
The base rate and economy were in massively different places when I made these purchases, but personal loans and car finance have stayed quite constant.
Except they haven't when you look at the figures as % premium over say Libor. The cost has blown exponentially since 2006. The base rate and economy were in massively different places when I made these purchases, but personal loans and car finance have stayed quite constant.
As rates rise the forward yield curve will push up those institutional costs and they will be passed on with the premium. The worse the borrower the higher that premium will be and the more debts they are going to have that are rising in costs.
Manufacturers' lending arms may attempt to swallow some of the initial rises so as to compete over sales but their whole business model has become beholden to the massive yield premiums of conning their customers into paying 6% for secured borrowing plus knowing that 2/3 years later they'll be able to rinse them again.
If you honestly look at this in the cold light of day just who on Earth, in their right mind would pay 6% for collateralised personal debt?!!!!
It's coming up to 30 years since we've been at this point in the rate cycle in the U.K. so many consumers have never experienced the reality of free market forces on consumers.
It bears no similarities to the events of 2008 when central government intervened and slammed rates to zero, printed billions of pounds and stopped the banks from foreclosing. Look at all the actions of de-leveraging consumer and residential property debt that have been being taken over the last few years the plan is very, very clear: When rates rise there is no intent for central government to intervene. Market forces will be permitted to take their natural course and clear out the weak to make way for the young and new.
Huntsman said:
There was a financial incentive to get in before the VED changes.Huntsman said:
It won't stop anytime soon. It's just so easy to get a car on x amount a month.As indicated in the article, I guess the VED changes could have pushed things. How much that equates to though, we won't really know.
The market for cars is rotten. As long as the manufacturers keep manipulating the prices of used, new cars will be the option to go for.
Sort of goes directly in the face of the supposed green and recycling agendas people pedal. On the one hand we are being told to recycle, on the other the powers that be want to prop the economy up via people buying a new example every 3 years.
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