Car credit hits £58bn out of total consumer credit of £200bn
Discussion
All this talk of a bubble in car finance world - personally, I just don't see it.
The housing bubble was caused by lenders lowering their acceptable lending criteria, which meant more people could get a mortgage on houses they couldn't afford. This caused a boom in the property market, and houses went up to silly levels. Acceptable lending criteria continued to fall (remember Northern Rock offering 110% of the property value?) and the market went higher. Then it all came crashing down as payment defaults came flooding in.
With the car market, you could argue that new cars are over inflated prices - although I think that is only because its relative to used car prices, which are a bargain by comparison. The reason for the buoyant used car market is because the first three years of a car ownership take the bulk of the price hit. Dealers can make this happen by offering new cars with decent monthly payments, coupled with either large deposits and low guaranteed values (or both). Whenever I've done a PCP, the GFV has always been way lower than the cars retail value at the end. The finance company has hedged its bets well - why wouldn't they? They need to protect their investment and can see from the endless flow of cars coming out of finance deals what the market values the cars at - and that value is a steady increase, not a dramatic shift that would predicate a bubble and its subsequent pop.
For leasing, the lease companies make all the money they need (save for a few loss leaders), and then send it off to auction for whatever they can make, it doesn't really matter, they'll recoup the vast majority of their costs in those first few years.
The additional factor in all of this is competition. Houses couldn't be built fast enough for whatever price the builders/sellers wanted. Whereas cars always have a comparative value. If an Audi A1 suddenly jumped to £50k, no one would buy it. There are too many competitors ready to take that market share for less money, which is a sliding scale depending on the brand - but its an opportunity for all. And there are too many used cars out there for the entire market to suddenly raise in price, so the gap between nearly-new and new would become so large, that they simply wouldn't sell.
Therefore, whilst more people are using finance - and in some cases that finance might be provided somewhat recklessly (I'd say exception rather than rule), I don't think all of the moving parts of the industry are sufficiently aligned to cause a bubble large enough that the whole thing will come crashing down.
The housing bubble was caused by lenders lowering their acceptable lending criteria, which meant more people could get a mortgage on houses they couldn't afford. This caused a boom in the property market, and houses went up to silly levels. Acceptable lending criteria continued to fall (remember Northern Rock offering 110% of the property value?) and the market went higher. Then it all came crashing down as payment defaults came flooding in.
With the car market, you could argue that new cars are over inflated prices - although I think that is only because its relative to used car prices, which are a bargain by comparison. The reason for the buoyant used car market is because the first three years of a car ownership take the bulk of the price hit. Dealers can make this happen by offering new cars with decent monthly payments, coupled with either large deposits and low guaranteed values (or both). Whenever I've done a PCP, the GFV has always been way lower than the cars retail value at the end. The finance company has hedged its bets well - why wouldn't they? They need to protect their investment and can see from the endless flow of cars coming out of finance deals what the market values the cars at - and that value is a steady increase, not a dramatic shift that would predicate a bubble and its subsequent pop.
For leasing, the lease companies make all the money they need (save for a few loss leaders), and then send it off to auction for whatever they can make, it doesn't really matter, they'll recoup the vast majority of their costs in those first few years.
The additional factor in all of this is competition. Houses couldn't be built fast enough for whatever price the builders/sellers wanted. Whereas cars always have a comparative value. If an Audi A1 suddenly jumped to £50k, no one would buy it. There are too many competitors ready to take that market share for less money, which is a sliding scale depending on the brand - but its an opportunity for all. And there are too many used cars out there for the entire market to suddenly raise in price, so the gap between nearly-new and new would become so large, that they simply wouldn't sell.
Therefore, whilst more people are using finance - and in some cases that finance might be provided somewhat recklessly (I'd say exception rather than rule), I don't think all of the moving parts of the industry are sufficiently aligned to cause a bubble large enough that the whole thing will come crashing down.
can't remember said:
Thirty years ago renting a £300 TV you couldn't afford meant you were poor, now renting a £30,000 car you can't afford means you are an aspirational go-getter.
If there's one thing both history and economics teaches us it's that we never learn from the mistakes of the past.
We werent poor and i remember my mum and dad renting a TV back in the 70s. It was the thing to do back then for most people when the product cost was high, the technology was changing regularly and reliability was an issue. It made sense to rent the latest tech video recorder for a tenner a month when the item itself cost £500 new and was likely to be prone to breakdown and likely to be replaced in a few years. They were seen as white goods items for most people and providing a service.If there's one thing both history and economics teaches us it's that we never learn from the mistakes of the past.
It wasnt a bad thing. What were those VHS video recorders worth at 5 years old? Or 10 years old?
Quite a commonality with cars then i guess?
Likewise back then, most people rented their homes, nowadays mortgaging your home is more prevalent. But is renting now a mistake because people did it in the past?
Edited by daemon on Friday 6th October 16:05
Not directly finance related but an interesting angle on the car market as a whole:
Car dealer Pendragon warns on profits as consumer demand 'wanes'
Car dealer Pendragon has sounded the alarm about health of Britain’s automotive industry, issuing a profit warning it blamed on falling demand for new cars and lower prices in the used market.
http://www.telegraph.co.uk/business/2017/10/23/car...
Car dealer Pendragon warns on profits as consumer demand 'wanes'
Car dealer Pendragon has sounded the alarm about health of Britain’s automotive industry, issuing a profit warning it blamed on falling demand for new cars and lower prices in the used market.
http://www.telegraph.co.uk/business/2017/10/23/car...
daemon said:
charltjr said:
I still don’t understand what’s supposed to cause this mass defaulting on loan agreements which will bring the whole “system” crashing down.
Interest rates go up, but these are fixed rate finance agreements so the cost doesn’t change. Sure, when the next deal time rolls around it might be unaffordable, so they go used/cheaper instead.
Where’s the massive sub-prime lending to cause the huge losses? I’m not seeing it.
Exactly. You're not seeing it because it wont happen.Interest rates go up, but these are fixed rate finance agreements so the cost doesn’t change. Sure, when the next deal time rolls around it might be unaffordable, so they go used/cheaper instead.
Where’s the massive sub-prime lending to cause the huge losses? I’m not seeing it.
eliot said:
daemon said:
charltjr said:
I still don’t understand what’s supposed to cause this mass defaulting on loan agreements which will bring the whole “system” crashing down.
Interest rates go up, but these are fixed rate finance agreements so the cost doesn’t change. Sure, when the next deal time rolls around it might be unaffordable, so they go used/cheaper instead.
Where’s the massive sub-prime lending to cause the huge losses? I’m not seeing it.
Exactly. You're not seeing it because it wont happen.Interest rates go up, but these are fixed rate finance agreements so the cost doesn’t change. Sure, when the next deal time rolls around it might be unaffordable, so they go used/cheaper instead.
Where’s the massive sub-prime lending to cause the huge losses? I’m not seeing it.
In a recent survey by the Financial Conduct Authority 17% of those paying a mortgage or rent (some 5.1 million adults) said they would struggle to cope if their payments increased by £50.
https://www.thesun.co.uk/money/4718930/could-you-c...
https://www.thesun.co.uk/money/4718930/could-you-c...
eliot said:
Indeed they are fixed - but if your mortgage goes up, you have more money going out and you might not be able to keep up the repayments on other commitments.
This, and I made the point away at the start of the thread. Fixed-rate credit is generally on lower-value items that will be the first to be given back when someone is forced to tighten their belts. Given the choice of downsizing the car or the house - which is easier?The last time this came round I did a few calculations on the back of an envelope. At 4% interest, the interest payments on a £25k car will work out at £3k, which doesn't seem too bad a price to pay to have the use of the car now rather than in three years time, so even if interest rates go up it shouldn't cause panic. On the other hand in the same period depreciation will be probably be somewhere between £10k and £15k, which makes me wonder why anyone would spend that amount for a fairly run of the mill car. I don't seem to be alone as the most popular cars are the Fiesta, Focus and Golf, with the Qashqai and Corsa not far behind. Sorry to disapppoint the Daily Mail readers (actually not true, I'm delighted to disappoint them 
) but perhaps we're not all going to hell in a hand cart.
) but perhaps we're not all going to hell in a hand cart.Gassing Station | General Gassing | Top of Page | What's New | My Stuff