Are the wheels about to fall of car finance?
Discussion
rxe said:
Just as with housing, it's ALL about residuals.
It's perfectly OK for an 18 year old on min wage to take out a mortgage on a £1m house with no deposit as long as the market is rising, and can be guaranteed to rise for the duration of the mortgage.
Ditto car finance. As long as dealers can keep the residuals high, then it stacks up. As soon as they can't hold the line, it all falls apart.
The risk here is more systemic and less individual. The loan is secured against an insured asset, and some level of depreciation has been planned in. The individual is not exposed, unless they get into financial distress. When the wheels do come off, the problem will be what to do with the vast industry that has grown up to service this somewhat unsustainable model.
That's it in a nutshell. It is simply about how the industry holds residuals up and should market forces become greater than the industry's ability to manipulate and control them then it all falls apart. It's perfectly OK for an 18 year old on min wage to take out a mortgage on a £1m house with no deposit as long as the market is rising, and can be guaranteed to rise for the duration of the mortgage.
Ditto car finance. As long as dealers can keep the residuals high, then it stacks up. As soon as they can't hold the line, it all falls apart.
The risk here is more systemic and less individual. The loan is secured against an insured asset, and some level of depreciation has been planned in. The individual is not exposed, unless they get into financial distress. When the wheels do come off, the problem will be what to do with the vast industry that has grown up to service this somewhat unsustainable model.
And you're absolutely right that it isn't an individual problem/risk but an industry/fincance one.
But, which two industries does the Western taxpayer keep bailing out? We just have to hope that the size of the losses aren't big enough for governments to use our money to bail out the very entities which have been ripping us off.
TooLateForAName said:
BOE said:
The past decade has seen the number of cars bought with a personal contract purchase (PCP) plan – under which the car is effectively leased – increase from one in five to four in five. Companies risk losing money if used car prices fall and Brazier said banks involved and the shareholders of car companies would “want to think very carefully about the risks”.
Surely that must be consumer sales only? Or are business leases now PCP type things?Sheepshanks said:
GregK2 said:
"Wells Fargo trims auto loans as market cools, risk overhaul kicks in"
https://www.reuters.com/article/us-wells-fargo-aut...
I imagine the market in the US could be a nightmare. I'm out of touch with it now, but it used to be that new cars were very cheap but used prices high (both compared to UK). So what they call personal leasing there (which in practice is more like our PCP) is often astonishingly cheap. That'll get completely messed up if residuals fall.https://www.reuters.com/article/us-wells-fargo-aut...
It's very different in the UK. We have far fewer jetski punters and ironically most have houses that can be seized anyway. We also don't have anywhere near the same army of comm salesmen.
But, that doesn't really matter because is residuals collapse in the US then statistically, within 6 months we will have the same sentiment change here and our residuals will fall. The UK car industry simply hasn't the ability to hold back enough stock to limit supply to counter a whole change in market sentiment.
WF has probably only stopped selling because the funds on the other side has stopped buying their debt packages and if that's the case then others will be following. That on its own may transpire to be enough to force change on the industry ahead of any spectacular funding and capital issue?
All eyes on DFS then. They recently blamed a slowdown in the sale of retail finance due to the recent election and how elections always stop people from wanting a new sofa they have no need of. Alternatively, it may transpire that people are being forced to sit on sofas that are more than 6 months old because they aren't able to borrow any more credit?
It's going to be an interesting 18 months but the real key is to look out for more profit warnings from traditional high street debt vendors and how farcical their excuses become.
I think the interesting discussion to be had is more around HOW it would play out, rather than IF. As with all PH threads - this discussion about the car finance world collapsing is now more about 'finance vs cash purchase' decision.
There's almost certainty *something* is going to happen even if only in the US (not sure it's possible to only happen there.. but as a bare minimum), the question is what, and how. Mapped out over another 10-15 years i can't see the current system being sustainable.
I imagine the biggest players would be the ones hit hardest, BMW Financial Services seem to provide finance products to half of the market here in the UK - i imagine they're pretty significant in the US too. If BMW used prices fall off a cliff because of a realisation shockwave of how many used cars are sat dormant and need to be sold to cover their debt liability (tied to GMFVs that are now higher than actual used values) - what happens?
Presumably it's similar to the financial crash - some insurers are being paid to insure the debt, or the company against the risks of the debt. Perhaps they go bust first as they don't actually have the capital to cover someone as large as BMW/other big brand going bust.
There's almost certainty *something* is going to happen even if only in the US (not sure it's possible to only happen there.. but as a bare minimum), the question is what, and how. Mapped out over another 10-15 years i can't see the current system being sustainable.
I imagine the biggest players would be the ones hit hardest, BMW Financial Services seem to provide finance products to half of the market here in the UK - i imagine they're pretty significant in the US too. If BMW used prices fall off a cliff because of a realisation shockwave of how many used cars are sat dormant and need to be sold to cover their debt liability (tied to GMFVs that are now higher than actual used values) - what happens?
Presumably it's similar to the financial crash - some insurers are being paid to insure the debt, or the company against the risks of the debt. Perhaps they go bust first as they don't actually have the capital to cover someone as large as BMW/other big brand going bust.
4941cc said:
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...).
Ford Options - mid 90sThat 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...).
s m said:
4941cc said:
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...).
Ford Options - mid 90sThat 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...).
jimmybell said:
I think the interesting discussion to be had is more around HOW it would play out, rather than IF. As with all PH threads - this discussion about the car finance world collapsing is now more about 'finance vs cash purchase' decision.
There's almost certainty *something* is going to happen even if only in the US (not sure it's possible to only happen there.. but as a bare minimum), the question is what, and how. Mapped out over another 10-15 years i can't see the current system being sustainable.
I imagine the biggest players would be the ones hit hardest, BMW Financial Services seem to provide finance products to half of the market here in the UK - i imagine they're pretty significant in the US too. If BMW used prices fall off a cliff because of a realisation shockwave of how many used cars are sat dormant and need to be sold to cover their debt liability (tied to GMFVs that are now higher than actual used values) - what happens?
Presumably it's similar to the financial crash - some insurers are being paid to insure the debt, or the company against the risks of the debt. Perhaps they go bust first as they don't actually have the capital to cover someone as large as BMW/other big brand going bust.
In theory, the car debt should be bundled in with other debt types and the losses should be easily absorbed by the holders and present little counter party risk to the banks. It wouldn't be great but on paper it shouldn't be terrible. There's almost certainty *something* is going to happen even if only in the US (not sure it's possible to only happen there.. but as a bare minimum), the question is what, and how. Mapped out over another 10-15 years i can't see the current system being sustainable.
I imagine the biggest players would be the ones hit hardest, BMW Financial Services seem to provide finance products to half of the market here in the UK - i imagine they're pretty significant in the US too. If BMW used prices fall off a cliff because of a realisation shockwave of how many used cars are sat dormant and need to be sold to cover their debt liability (tied to GMFVs that are now higher than actual used values) - what happens?
Presumably it's similar to the financial crash - some insurers are being paid to insure the debt, or the company against the risks of the debt. Perhaps they go bust first as they don't actually have the capital to cover someone as large as BMW/other big brand going bust.
I guess the concern is that it may roll over into the value of other consumer debt bonds and be a bigger problem.
The real question is how long consumers in the West can keep borrowing and keep buying stuff. With no wage inflation for the majority for approaching a decade and many households consuming more than they earn then the basic law of elementary maths tells us that at some point they will run out of ability to borrow more and even hit the point at not being able to finance what they have already.
So the real argument is whether we are approaching that point now or whether it is years down the line with plenty of capacity for consumers to keep on borrowing and spending.
Personally, I'm hardly bullish on this and that's why I think we should watch the news from low end high street retailers who are primary consumer debt vendors for signs of a slowdown in purchasing as a key indicator that capacity to borrow is peaking.
Interestingly, this is all separate from whether rates rise or not.
DonkeyApple said:
In theory, the car debt should be bundled in with other debt types and the losses should be easily absorbed by the holders and present little counter party risk to the banks. It wouldn't be great but on paper it shouldn't be terrible.
I guess the concern is that it may roll over into the value of other consumer debt bonds and be a bigger problem.
The real question is how long consumers in the West can keep borrowing and keep buying stuff. With no wage inflation for the majority for approaching a decade and many households consuming more than they earn then the basic law of elementary maths tells us that at some point they will run out of ability to borrow more and even hit the point at not being able to finance what they have already.
So the real argument is whether we are approaching that point now or whether it is years down the line with plenty of capacity for consumers to keep on borrowing and spending.
Personally, I'm hardly bullish on this and that's why I think we should watch the news from low end high street retailers who are primary consumer debt vendors for signs of a slowdown in purchasing as a key indicator that capacity to borrow is peaking.
Interestingly, this is all separate from whether rates rise or not.
I'm no expert but I've suspected for a long time that the real reason interest rates are being kept so low is that the sI guess the concern is that it may roll over into the value of other consumer debt bonds and be a bigger problem.
The real question is how long consumers in the West can keep borrowing and keep buying stuff. With no wage inflation for the majority for approaching a decade and many households consuming more than they earn then the basic law of elementary maths tells us that at some point they will run out of ability to borrow more and even hit the point at not being able to finance what they have already.
So the real argument is whether we are approaching that point now or whether it is years down the line with plenty of capacity for consumers to keep on borrowing and spending.
Personally, I'm hardly bullish on this and that's why I think we should watch the news from low end high street retailers who are primary consumer debt vendors for signs of a slowdown in purchasing as a key indicator that capacity to borrow is peaking.
Interestingly, this is all separate from whether rates rise or not.
t will hit the fan if they rise.TooLateForAName said:
I'm no expert but I've suspected for a long time that the real reason interest rates are being kept so low is that the st will hit the fan if they rise.
Plus, governments need to keep the people borrowing and consuming rampantly so as to keep receiving the taxation desperately needed to fund its own debt costs which grows bigger and bigger every year. t will hit the fan if they rise.But probably the largest issue lies in the bond market where rising rates will trigger a fall in bond values and what many are saying is that the size of that fall will dwarf the 2008 losses.
One thing is for sure and that is that if the car manaufacters lose control of 3 year values to true market forces then it's unlikely they could restructure their businesses quickly enough to come close to matching the shifting market dynamic and I think you'll find them all demanding bail-outs again as per 2009.
TooLateForAName said:
I'm no expert but I've suspected for a long time that the real reason interest rates are being kept so low is that the st will hit the fan if they rise.
I am in agreement with this. House prices are now far too high compared to wages. People have borrowed too much to buy a home which is too expensive and a rise in rates, combined with a fall in prices and job losses will be cataclysmic for the economy. t will hit the fan if they rise.Now the threat of inflation has normalised slightly as uncertainty becomes the new certainty I think the chances of rate rises occurring at anything other than a slow and progressive rate are low.
People forget the Bank used to move rates around very regularly and people were often caught out - they lacked transparency and were hard to second guess.
Merv K was an odd bloke but Carney (like him or loath him, personally I rate the guy) has realised that not only should transparency be high but sentiment can be shifted via statement thus meaning that they have more subtle ways to influence/nudge consumer and business behaviours rather than through the binary movement of rates.
Using verbal messages around intent increases the sensitivity of the average punter to the macro economic picture (albeit from low to quite low on average) and their part in it
I think we will be OK
People forget the Bank used to move rates around very regularly and people were often caught out - they lacked transparency and were hard to second guess.
Merv K was an odd bloke but Carney (like him or loath him, personally I rate the guy) has realised that not only should transparency be high but sentiment can be shifted via statement thus meaning that they have more subtle ways to influence/nudge consumer and business behaviours rather than through the binary movement of rates.
Using verbal messages around intent increases the sensitivity of the average punter to the macro economic picture (albeit from low to quite low on average) and their part in it
I think we will be OK
It's absolutely guaranteed that rate rises when they finally appear will be nice and slow and well announced in advance and everything will be cool and the gang.
It is also absolutely guaranteed that the central banks will then lose control and that market forces will take control and rates will rapidly overshoot the point where they will eventually settle.
Never in the history of mankind has there ever been an upward leg of a rate cycle that remained under the control of the rate setters beyond the initial and mid phases. And it categorically isn't going to happen this time.
It's this final phase of the upward cycle that will clear the decks, not the stage managed, happy clappy first phase.
It is also absolutely guaranteed that the central banks will then lose control and that market forces will take control and rates will rapidly overshoot the point where they will eventually settle.
Never in the history of mankind has there ever been an upward leg of a rate cycle that remained under the control of the rate setters beyond the initial and mid phases. And it categorically isn't going to happen this time.
It's this final phase of the upward cycle that will clear the decks, not the stage managed, happy clappy first phase.
4941cc said:
s m said:
4941cc said:
Ford introduced the PCP nearly 25 years ago, branded as Ford Options.
Ford Options - mid 90sI also remember schemes before then
CS Garth said:
Now the threat of inflation has normalised slightly as uncertainty becomes the new certainty I think the chances of rate rises occurring at anything other than a slow and progressive rate are low.
People forget the Bank used to move rates around very regularly and people were often caught out - they lacked transparency and were hard to second guess.
Merv K was an odd bloke but Carney (like him or loath him, personally I rate the guy) has realised that not only should transparency be high but sentiment can be shifted via statement thus meaning that they have more subtle ways to influence/nudge consumer and business behaviours rather than through the binary movement of rates.
Using verbal messages around intent increases the sensitivity of the average punter to the macro economic picture (albeit from low to quite low on average) and their part in it
I think we will be OK
Lalalalalalalala fingers in ears can't hear you Carney.People forget the Bank used to move rates around very regularly and people were often caught out - they lacked transparency and were hard to second guess.
Merv K was an odd bloke but Carney (like him or loath him, personally I rate the guy) has realised that not only should transparency be high but sentiment can be shifted via statement thus meaning that they have more subtle ways to influence/nudge consumer and business behaviours rather than through the binary movement of rates.
Using verbal messages around intent increases the sensitivity of the average punter to the macro economic picture (albeit from low to quite low on average) and their part in it
I think we will be OK
He's been making these 'stop borrowing you morons' statements for a while... not been terribly successful so far. If borrowing to invest, expand, create, increase tax take then its fine. But iPhones and Audis aren't sustainable long term. Hold cash and brace for impact.
TooLateForAName said:
I'm no expert but I've suspected for a long time that the real reason interest rates are being kept so low is that the st will hit the fan if they rise.
To coin a phrase used by the 19y/o apprentice living with his parents down the road, current washing his new, white BMW 116, prior to taking a few pics of it with his new iPhone 7 to post on insta...t will hit the fan if they rise.'Obvs'
Henners said:
TooLateForAName said:
I'm no expert but I've suspected for a long time that the real reason interest rates are being kept so low is that the st will hit the fan if they rise.
To coin a phrase used by the 19y/o apprentice living with his parents down the road, current washing his new, white BMW 116, prior to taking a few pics of it with his new iPhone 7 to post on insta...t will hit the fan if they rise.'Obvs'
Edited by lord trumpton on Wednesday 26th July 21:35
Edited by lord trumpton on Wednesday 26th July 21:59
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