Are the wheels about to fall of car finance?

Are the wheels about to fall of car finance?

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Discussion

patch5674

Original Poster:

213 posts

59 months

Saturday 25th March 2017
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JPJPJP

7,755 posts

115 months

Saturday 25th March 2017
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caelite

4,198 posts

59 months

Saturday 25th March 2017
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Got one without a paywall?

4941cc

25,794 posts

153 months

Saturday 25th March 2017
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patch5674 said:
“PCP started at the premium end about 10 years ago, partly because of changes to the way that company cars were taxed. Since then it has spread to the mass market,” says Trevor Finn, chief executive of car dealership chain Pendragon.
He's got that arse about face, Ford introduced the PCP nearly 25 years ago, branded as Ford Options 1-2-3, their volume competitors took on the idea to remain competitive, the premium brands followed soon after. Not long after that, the 3 Series outsold the Mondeo and its equivalents from Audi and Merc combined to render the mid size saloon from a volume brand practically irrelevant, the near extinction of the 406/Xantia/Laguna/Mondeo/Vectra segment was a consequence.

That unprecedented volume hugely increased the German brands' presence and profitability, producing money from which they could diversify from a relatively small range of saloons and estates into every market sector you can think of and invented a few more along the way and here we are, with a great number of people all rolling the log to create the illusion of wealth when their real financial position is often bloody terrifying.

I've spent the last 17 years making a living from keeping those logs rolling, but the amounts of people coming into showrooms now in large piles of negative equity, thinking they can change their cars almost whimsically are un-nerving. The most common situations resulting in no deals now are those who think they can change for a new car that's the same or better than their current one (usually around 2 years into a 4 year PCP, taken out with low or no deposit last time), with no cash in and with ideally a lower monthly repayment.

"I'd like a bigger house in a nicer area, without putting any money in, negative equity in my house and struggling to make my current mortgage payments as it is please Mr. Estate Agent, what can you show me?" People understand that analogy, but lose all concept of it when its applied to something shiny with four wheels.

PCPs work best by running the full term. Want to change every 2 years? Fine, take a two year PCP. Don't take a 4 year one for the lowest repayment and then come back two years later and get the arse with me because you're upside down.

We're reaching the point now where even busting out a deal for 0.5-1.5% retained margin doesn't give enough discount to offset their neg egg and of course they haven't got any savings to cover that portion which we can't. This is where we got to around ten years ago too. Before everything *corrected* itself.

So yes, the wheels are wobbling a bit.

The problem is that people have got used to it and have a hard time when confronted with the reality of their budget vs. aspiration and have to consider either going for a lower spec model, or one from lower in their preferred manufacturer's range or worse still, having to trade down to a volume brand and find some justification to people as to why they've "downsized" and lost face in the race with the Joneses (who are also having the same dilemma, but don't want you to realise it...).

daemon

23,902 posts

144 months

Saturday 25th March 2017
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4941cc said:
patch5674 said:
“PCP started at the premium end about 10 years ago, partly because of changes to the way that company cars were taxed. Since then it has spread to the mass market,” says Trevor Finn, chief executive of car dealership chain Pendragon.
He's got that arse about face, Ford introduced the PCP nearly 25 years ago, branded as Ford Options 1-2-3, their volume competitors took on the idea to remain competitive, the premium brands followed soon after. Not long after that, the 3 Series outsold the Mondeo and its equivalents from Audi and Merc combined to render the mid size saloon from a volume brand practically irrelevant, the near extinction of the 406/Xantia/Laguna/Mondeo/Vectra segment was a consequence.

That unprecedented volume hugely increased the German brands' presence and profitability, producing money from which they could diversify from a relatively small range of saloons and estates into every market sector you can think of and invented a few more along the way and here we are, with a great number of people all rolling the log to create the illusion of wealth when their real financial position is often bloody terrifying.

I've spent the last 17 years making a living from keeping those logs rolling, but the amounts of people coming into showrooms now in large piles of negative equity, thinking they can change their cars almost whimsically are un-nerving. The most common situations resulting in no deals now are those who think they can change for a new car that's the same or better than their current one (usually around 2 years into a 4 year PCP, taken out with low or no deposit last time), with no cash in and with ideally a lower monthly repayment.

"I'd like a bigger house in a nicer area, without putting any money in, negative equity in my house and struggling to make my current mortgage payments as it is please Mr. Estate Agent, what can you show me?" People understand that analogy, but lose all concept of it when its applied to something shiny with four wheels.

PCPs work best by running the full term. Want to change every 2 years? Fine, take a two year PCP. Don't take a 4 year one for the lowest repayment and then come back two years later and get the arse with me because you're upside down.

We're reaching the point now where even busting out a deal for 0.5-1.5% retained margin doesn't give enough discount to offset their neg egg and of course they haven't got any savings to cover that portion which we can't. This is where we got to around ten years ago too. Before everything *corrected* itself.

So yes, the wheels are wobbling a bit.

The problem is that people have got used to it and have a hard time when confronted with the reality of their budget vs. aspiration and have to consider either going for a lower spec model, or one from lower in their preferred manufacturer's range or worse still, having to trade down to a volume brand and find some justification to people as to why they've "downsized" and lost face in the race with the Joneses (who are also having the same dilemma, but don't want you to realise it...).
+1

Totally hits the nail on the head.

I remember Ford doing the Ford Options scheme on the mk2 fiesta. It seemed outrageous at the time.

PCP deals "work" if you're going to keep it to term or pretty close to term.

Its the small minority who try to bail early who get burnt - Trying to dig yourself out of a 4 year PCP deal in year 2 is crazy.

MuscleSaloon

834 posts

122 months

Saturday 25th March 2017
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Manufacturers will keep providing ways to sell their product, whatever that takes. GFV's seem to have been reduced slightly on certain deals lately but will it really make much difference? Most people I speak to won't get out of bed for less than £40k-£50k a year these days. Finding a few extra £k every 2 or 3 years to fund another new vehicle via a PCP won't be a show stopper.

CharlesdeGaulle

11,030 posts

127 months

Saturday 25th March 2017
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4941cc said:
Lots of sensible stuff
Great post.

Sheepshanks

18,431 posts

66 months

Saturday 25th March 2017
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4941cc said:
Ford introduced the PCP nearly 25 years ago, branded as Ford Options 1-2-3,
I remember my brother getting a Fiesta for his missus many years ago on PCP and that ended up way in negative equity so that's nothing new. He was dismayed as they'd px'd her old car and now had nothing.

I always thought Toyota were credited as "inventing" PCP.

No idea on numbers, but I saw an industry article the other day saying PCH take up is "exploding" and manufactures are scrabbling to make sure they don't miss out.

gizlaroc

13,093 posts

171 months

Saturday 25th March 2017
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I have been one of the biggest advocates of financing cars, and still am, however, the PCP deals are bordering on a scam and mis selling imho, especially on used cars where the APR is sky high.

I just borrowed £30k from Hitachi Capital Finance for 2.89% at £537 a month.
BMW wanted me to borrow from them at only £527 a month.
He said that ''We Guarantee your car will be worth £13000 at the end of the term."
I kept saying "No, you guarantee that if I want to keep my car at the end of the term I will have to give you an additional £13,000 for the privilege."
Considering this guy was selling finance it was scary the fact he simply didn't get what I was saying.

Currently people are paying the equivalent in extra interest to the balloon at the end, and that is why I think car finance will be the new PPI, it is bordering on mis selling.

MoelyCrio

2,383 posts

129 months

Saturday 25th March 2017
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CharlesdeGaulle said:
4941cc said:
Lots of sensible stuff
Great post.
Indeed. Good to hear from somebody who gets to see underneath the wealth illusion as part of their job.
I know somebody who has a Merc SUV on PCP but who has to pay for the insurance monthly. She wasnt in any way embarrassed about admitting it either. She thought everybody did it.

Olf

11,956 posts

165 months

Saturday 25th March 2017
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4941cc said:
The problem is that people have got used to it and have a hard time when confronted with the reality of their budget vs. aspiration and have to consider either going for a lower spec model, or one from lower in their preferred manufacturer's range or worse still, having to trade down to a volume brand and find some justification to people as to why they've "downsized" and lost face in the race with the Joneses (who are also having the same dilemma, but don't want you to realise it...).
Great post and very reminiscent of 2007 in housing.

People like Lex have been doing PCP for decades. It really took of when company car schemes moved to a cash only offering.

I am rally struggling when I hear friends who suddenly have a Range Rover saying - 'and the dealer said we can chop in in for another one in two year because the volume works for him' and I just cringe. Someone is going to take a massive hit on this pile of 2yo range rovers flooding onto the market just about the time Brexit pain hits proper.

Edited by Olf on Saturday 25th March 22:06

Sheepshanks

18,431 posts

66 months

Saturday 25th March 2017
quotequote all
gizlaroc said:
I kept saying "No, you guarantee that if I want to keep my car at the end of the term I will have to give you an additional £13,000 for the privilege."
Considering this guy was selling finance it was scary the fact he simply didn't get what I was saying.
I've long said PCP is a scam as it's basically a trap.

To be fair though, you're not really supposed to use PCP if you're going to keep the car. Indeed the article above continually refers to leasing.

The GFV term has been dropped now and replaced by Optional Final Payment, but I suppose they could argue that the guarantee bit is they guarantee you won't lose money even if the car is in negative equity.

Yipper

5,964 posts

37 months

Saturday 25th March 2017
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The FT article is just a rehash of a Guardian article that has been rehashed every year or two since about 2011...

For sure, the PCP upcycle will end at some point. UK new car sales will decline this year, so 2017 may well be the start of the end (until the next cycle).

One thing is certain -- the vast majority of UK consumers on PCP and lease deals must be getting royally ripped off. Like, absolutely wallet-raped. Because when I check all the PCP and lease deals online and in showrooms, ~98% of them are overpriced and absolutely rubbish. If 70-80% of buyers are PCPing and leasing, that is a million people getting screwed over by dealers and manufacturers every year...

brickwall

3,107 posts

157 months

Saturday 25th March 2017
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4941cc makes a lot of sensible points.

The market has been propped up by cheap financing costs and firm car residual values.

What I don't understand is why car residuals have held up so well, in the face of booming new-car sales for the last 3-5 years - supposedly driven by (typically 2-5 year) PCP deals. Surely this should have fed through into a greater supply of used cars - depressing values. But this doesn't seem to have happened - what is keeping used car prices so high?

It could all easily unwind very quickly - when the economy 'wobbled' in late '08 (before hitting proper recession) used car values fell very quickly...I remember massive discounts being offered.

Mandat

2,918 posts

185 months

Saturday 25th March 2017
quotequote all
Yipper said:
One thing is certain -- the vast majority of UK consumers on PCP and lease deals must be getting royally ripped off. Like, absolutely wallet-raped. Because when I check all the PCP and lease deals online and in showrooms, ~98% of them are overpriced and absolutely rubbish. If 70-80% of buyers are PCPing and leasing, that is a million people getting screwed over by dealers and manufacturers every year...
Excuse my ignorance, but why do you think that all PCP and lease deals are a rip off?

As I understand it, PCP is similar to regular HP but with a final payment deferred to the end of the terms, which the customer can choose to pay or not (in very simple terms).

ging84

5,844 posts

93 months

Saturday 25th March 2017
quotequote all
My take on it is that manufacturers have swapped stock piling unsold new cars in bad times, for leasing them for what ever they can get even if it's likely to be an on paper loss. Then if necessary stock piling some of them when they a 2-3-4 years old if they need to avoid flooding the market with cheap cars.

Seems like a fairly good plan, the only question is are all the accountants on the same page, or have some been leading others to believe a much more rosy picture.

Welshbeef

38,277 posts

145 months

Saturday 25th March 2017
quotequote all
It's always worrying when you go into a dealership with cash ready to go and they will offer you a far worse deal to buy a new car then if you take a PCP!


Another one to watch out for is PCH.


It's also a worry where you have kids running Golf Rs but worry about the insurance. Yet when I gree up you skimmped and might have a 1.1ltr brown Nova wishing to maybe getting into a 1.3Sr but forget about the 1.6 GSI.

CS Garth

2,093 posts

52 months

Saturday 25th March 2017
quotequote all
brickwall said:
What I don't understand is why car residuals have held up so well, in the face of booming new-car sales for the last 3-5 years - supposedly driven by (typically 2-5 year) PCP deals. Surely this should have fed through into a greater supply of used cars - depressing values. But this doesn't seem to have happened - what is keeping used car prices so high? .
Because the manufacturers now control the used car market as the pcp market has the brucie bonus of their getting the cars back they have "sold" at the end of term. Thus they can dictate price and keep it artificially high. Remember the old days when a new car would lose 20 percent the minute it drive off the forecourt? Not any more (or at least ignoring trade values). That's also why nearly new cars at dealers cost more than new cars from the brokers.

brickwall

3,107 posts

157 months

Saturday 25th March 2017
quotequote all
CS Garth said:
brickwall said:
What I don't understand is why car residuals have held up so well, in the face of booming new-car sales for the last 3-5 years - supposedly driven by (typically 2-5 year) PCP deals. Surely this should have fed through into a greater supply of used cars - depressing values. But this doesn't seem to have happened - what is keeping used car prices so high? .
Because the manufacturers now control the used car market as the pcp market has the brucie bonus of their getting the cars back they have "sold" at the end of term. Thus they can dictate price and keep it artificially high. Remember the old days when a new car would lose 20 percent the minute it drive off the forecourt? Not any more (or at least ignoring trade values). That's also why nearly new cars at dealers cost more than new cars from the brokers.
Sure the dealer can stick whatever price they like on cars they get back off PCP deals, but that doesn't mean people will buy them! Are there stacks of unsold 2-4 year old cars sitting around? If so, on who's books? And on what basis are they writing them down?

Krikkit

16,624 posts

128 months

Saturday 25th March 2017
quotequote all
Mandat said:
Yipper said:
One thing is certain -- the vast majority of UK consumers on PCP and lease deals must be getting royally ripped off. Like, absolutely wallet-raped. Because when I check all the PCP and lease deals online and in showrooms, ~98% of them are overpriced and absolutely rubbish. If 70-80% of buyers are PCPing and leasing, that is a million people getting screwed over by dealers and manufacturers every year...
Excuse my ignorance, but why do you think that all PCP and lease deals are a rip off?

As I understand it, PCP is similar to regular HP but with a final payment deferred to the end of the terms, which the customer can choose to pay or not (in very simple terms).
I think he means that a lot of lease/finance deals direct from the manufacturer can be over-priced compared to the standard broker deals. Sometimes they're hundreds/month higher, which adds up.

Most people will go direct to the showroom rather than a broker I think (would be interesting to see some data on that).

Edited by Krikkit on Saturday 25th March 22:24