Who suffers if there is a used car price correction?
Discussion
There are discussions on the possibility of a price corrections and there are people arguing for and against a correction, with supporting reasoning.
Personally I think there will be a correction, and hope it does happen, as it will reduce differentials when I buy the next car.
While people don't like to think of losing value, it isn't necessarily a bad thing.
It has made me wonder who suffers if there are cases where a market fall is a bad thing.
Here are my initial thoughts.
a. Dealers with expensive stock, that they could make a loss on.
b. People who have bought as an investment
c. PCP finance companies, which would have set balloon payment too high
d. People who trade down to release cash (or reduce debt)
Any other cases?
Personally I think there will be a correction, and hope it does happen, as it will reduce differentials when I buy the next car.
While people don't like to think of losing value, it isn't necessarily a bad thing.
It has made me wonder who suffers if there are cases where a market fall is a bad thing.
Here are my initial thoughts.
a. Dealers with expensive stock, that they could make a loss on.
b. People who have bought as an investment
c. PCP finance companies, which would have set balloon payment too high
d. People who trade down to release cash (or reduce debt)
Any other cases?
My understanding of how PCP works is (price of car + interest - balloon payment) / term = monthly payment. If the starting point is current market value then the only way for a monthly payment to be affordable is for the balloon / GFV to be correspondingly high? If not people who have bought secondhand cars on PCP in the last 6/12mths must be paying £5-600/mth for very average cars, surely?
With no new cars to sell I would imagine dealers have been trying to make “the monthlies” even more attractive to stay in business which can only mean people are going to be screwed at the end of their term if the final payment is £3-4k higher than the corrected market value of the car?
With no new cars to sell I would imagine dealers have been trying to make “the monthlies” even more attractive to stay in business which can only mean people are going to be screwed at the end of their term if the final payment is £3-4k higher than the corrected market value of the car?
Most likely the dealers with the top end stuff won't take a massive hit. It will be the mid range (20-50k) where the margins are thinner and they have less room to play with who will either need to take a hit or hold and seriously reduce cashflow. It does depend on their business strategy.
Investors will be hit as luxury goods lose their ROI very quickly. They will most likely take the hit and move onto more traditional investments.
PCP companies most likely will make up some of the lost margin on increased interest rates and by cutting staff/overheads quickly. This should enable them to survive the next couple of years.
The potential winners will be people who saved some money & didn't get caught up in the hype of an overinflated market. Then should be able to pick up a bargain. This has started already in the watch market where the Non-Grail watches (think GT3/GT4 etc as a Grail equivalent) are softening as people are really looking at their monthly budgets.
Investors will be hit as luxury goods lose their ROI very quickly. They will most likely take the hit and move onto more traditional investments.
PCP companies most likely will make up some of the lost margin on increased interest rates and by cutting staff/overheads quickly. This should enable them to survive the next couple of years.
The potential winners will be people who saved some money & didn't get caught up in the hype of an overinflated market. Then should be able to pick up a bargain. This has started already in the watch market where the Non-Grail watches (think GT3/GT4 etc as a Grail equivalent) are softening as people are really looking at their monthly budgets.
Robberto said:
My understanding of how PCP works is (price of car + interest - balloon payment) / term = monthly payment. If the starting point is current market value then the only way for a monthly payment to be affordable is for the balloon / GFV to be correspondingly high? If not people who have bought secondhand cars on PCP in the last 6/12mths must be paying £5-600/mth for very average cars, surely?
With no new cars to sell I would imagine dealers have been trying to make “the monthlies” even more attractive to stay in business which can only mean people are going to be screwed at the end of their term if the final payment is £3-4k higher than the corrected market value of the car?
If that is the case does it not mean they have less per month and it is the finance company that takes the hit when you hand it back? With no new cars to sell I would imagine dealers have been trying to make “the monthlies” even more attractive to stay in business which can only mean people are going to be screwed at the end of their term if the final payment is £3-4k higher than the corrected market value of the car?
911hope said:
So you probably believe there won't be a correction, but who suffers is there is?
I'd say the only way they'll be a crash is via lack of sales, and so all the dealers, franchise and otherwise will suffer, a drying up of demand with a lack of fiscal support (ie no furlough and no government loans) and you may get the odd dealer having to ditching stock at cost price to bail ie they see the writing on the wall (they must have their fingers on the pulse?) and don't want to be left holding the baby?But little (no?) sign of this yet?
I think "Supercar Finance" will be greatly reduced.
Today, you can't watch a video or podcast such as Harry's Garage, JayEmm or The Intercooler without having Magnitude Finance, Oracle or JBR Capital promoted as the way to get behind the wheel of the car of your dreams.
And why not? After all, if values are going to hold steady and borrowing money is dirt-cheap, why wouldn't you choose two years in a Ferrari, for an affordable three-figure monthly payment? And if you come out of it with some equity, let's roll it on and try something else. Chris Harris is merely the most prominent past exponent of this particular wildly successful branch of man maths.
However, the party depends on the combination of low interest rates and high used values for 5-10 year old performance cars. Since both these factors look like becoming significantly less favourable over the coming 12 months, there's a definite chance of too many used cars for sale chasing too few buyers, with the risk of a bit of a descending price spiral as people try to get out of financed cars before they become worth less than the outstanding debt (note that in these deals, unlike PCP, the customer bears the asset price risk).
I've got absolutely nothing against car enthusiasts who've taken up this opportunity to drive great cars, it just looks like one that logically is likely to be coming to a bit of an end soon if the current economic predictions bear out.
So the potential losers - Supercar Finance companies, their customers, and potentially Aston Martin, McLaren, Lamborghini & Ferrari (in descending order of vulnerability).
Today, you can't watch a video or podcast such as Harry's Garage, JayEmm or The Intercooler without having Magnitude Finance, Oracle or JBR Capital promoted as the way to get behind the wheel of the car of your dreams.
And why not? After all, if values are going to hold steady and borrowing money is dirt-cheap, why wouldn't you choose two years in a Ferrari, for an affordable three-figure monthly payment? And if you come out of it with some equity, let's roll it on and try something else. Chris Harris is merely the most prominent past exponent of this particular wildly successful branch of man maths.
However, the party depends on the combination of low interest rates and high used values for 5-10 year old performance cars. Since both these factors look like becoming significantly less favourable over the coming 12 months, there's a definite chance of too many used cars for sale chasing too few buyers, with the risk of a bit of a descending price spiral as people try to get out of financed cars before they become worth less than the outstanding debt (note that in these deals, unlike PCP, the customer bears the asset price risk).
I've got absolutely nothing against car enthusiasts who've taken up this opportunity to drive great cars, it just looks like one that logically is likely to be coming to a bit of an end soon if the current economic predictions bear out.
So the potential losers - Supercar Finance companies, their customers, and potentially Aston Martin, McLaren, Lamborghini & Ferrari (in descending order of vulnerability).
Toltec said:
Robberto said:
My understanding of how PCP works is (price of car + interest - balloon payment) / term = monthly payment. If the starting point is current market value then the only way for a monthly payment to be affordable is for the balloon / GFV to be correspondingly high? If not people who have bought secondhand cars on PCP in the last 6/12mths must be paying £5-600/mth for very average cars, surely?
With no new cars to sell I would imagine dealers have been trying to make “the monthlies” even more attractive to stay in business which can only mean people are going to be screwed at the end of their term if the final payment is £3-4k higher than the corrected market value of the car?
If that is the case does it not mean they have less per month and it is the finance company that takes the hit when you hand it back? With no new cars to sell I would imagine dealers have been trying to make “the monthlies” even more attractive to stay in business which can only mean people are going to be screwed at the end of their term if the final payment is £3-4k higher than the corrected market value of the car?
Car cost £30k now, would have been £25k without current market pressures. For the sake of round numbers, interest for the term is £5k so the total to finance is £35k. Final balloon payment offered is £20k so total to finance is £15k over 36mths, monthly payment therefore is £416.67/mth.
Fast forward 36 months, customer makes last monthly payment and is presented with an invoice for the final £20k. They check the market and there’s been a correction, car is now worth £15k. Customer can’t sell the car to settle the finance, so I guess mostly the customers will be screwed, followed by the finance companies whose customers default.
Robberto said:
My understanding of how PCP works is (price of car + interest - balloon payment) / term = monthly payment. If the starting point is current market value then the only way for a monthly payment to be affordable is for the balloon / GFV to be correspondingly high? If not people who have bought secondhand cars on PCP in the last 6/12mths must be paying £5-600/mth for very average cars, surely?
Whilst you’ve explained the basic mechanism of PCP correctly, from what I’ve seen having price shopped PCP deals last summer and beginning of this. The dealers for used (or manufacturers for new) are not increasing the GFV rather as your part-ex is worth considerably more now than it would have been on previous deal they are using additional windfall equity to fatten the deposit/initial payment, so the monthlies are relatively unchanged. Robberto said:
Maybe I’ve used the wrong terminology but I’m not referring to leasing where you would be right. I’m referring to finance where you have a balloon payment at the end of the term to own the car. The plan with those is that the guaranteed final value is lower than true market value and so you have the deposit for the next car. In the current market I would imagine the following scenario:
Car cost £30k now, would have been £25k without current market pressures. For the sake of round numbers, interest for the term is £5k so the total to finance is £35k. Final balloon payment offered is £20k so total to finance is £15k over 36mths, monthly payment therefore is £416.67/mth.
Fast forward 36 months, customer makes last monthly payment and is presented with an invoice for the final £20k. They check the market and there’s been a correction, car is now worth £15k. Customer can’t sell the car to settle the finance, so I guess mostly the customers will be screwed, followed by the finance companies whose customers default.
For a manufacturer-backed PCP deal on a new car, the customer can simply hand the car back at the end of the term and walk away. If the car's worth less than the 'guaranteed final value', then the manufacturer's finance arm takes the loss.Car cost £30k now, would have been £25k without current market pressures. For the sake of round numbers, interest for the term is £5k so the total to finance is £35k. Final balloon payment offered is £20k so total to finance is £15k over 36mths, monthly payment therefore is £416.67/mth.
Fast forward 36 months, customer makes last monthly payment and is presented with an invoice for the final £20k. They check the market and there’s been a correction, car is now worth £15k. Customer can’t sell the car to settle the finance, so I guess mostly the customers will be screwed, followed by the finance companies whose customers default.
The supercar finance places I describe do work in the way you're thinking of, the customer has the asset risk, so if it's worth less than the final balloon payment then the customer could end up having to make up the shortfall. I don't know how common such finance deals are outside the 'supercar' area of the market.
b0rk said:
Robberto said:
My understanding of how PCP works is (price of car + interest - balloon payment) / term = monthly payment. If the starting point is current market value then the only way for a monthly payment to be affordable is for the balloon / GFV to be correspondingly high? If not people who have bought secondhand cars on PCP in the last 6/12mths must be paying £5-600/mth for very average cars, surely?
Whilst you’ve explained the basic mechanism of PCP correctly, from what I’ve seen having price shopped PCP deals last summer and beginning of this. The dealers for used (or manufacturers for new) are not increasing the GFV rather as your part-ex is worth considerably more now than it would have been on previous deal they are using additional windfall equity to fatten the deposit/initial payment, so the monthlies are relatively unchanged. 
samoht said:
Robberto said:
Maybe I’ve used the wrong terminology but I’m not referring to leasing where you would be right. I’m referring to finance where you have a balloon payment at the end of the term to own the car. The plan with those is that the guaranteed final value is lower than true market value and so you have the deposit for the next car. In the current market I would imagine the following scenario:
Car cost £30k now, would have been £25k without current market pressures. For the sake of round numbers, interest for the term is £5k so the total to finance is £35k. Final balloon payment offered is £20k so total to finance is £15k over 36mths, monthly payment therefore is £416.67/mth.
Fast forward 36 months, customer makes last monthly payment and is presented with an invoice for the final £20k. They check the market and there’s been a correction, car is now worth £15k. Customer can’t sell the car to settle the finance, so I guess mostly the customers will be screwed, followed by the finance companies whose customers default.
For a manufacturer-backed PCP deal on a new car, the customer can simply hand the car back at the end of the term and walk away. If the car's worth less than the 'guaranteed final value', then the manufacturer's finance arm takes the loss.Car cost £30k now, would have been £25k without current market pressures. For the sake of round numbers, interest for the term is £5k so the total to finance is £35k. Final balloon payment offered is £20k so total to finance is £15k over 36mths, monthly payment therefore is £416.67/mth.
Fast forward 36 months, customer makes last monthly payment and is presented with an invoice for the final £20k. They check the market and there’s been a correction, car is now worth £15k. Customer can’t sell the car to settle the finance, so I guess mostly the customers will be screwed, followed by the finance companies whose customers default.
The supercar finance places I describe do work in the way you're thinking of, the customer has the asset risk, so if it's worth less than the final balloon payment then the customer could end up having to make up the shortfall. I don't know how common such finance deals are outside the 'supercar' area of the market.
MDMA . said:
As above. Customer just walks away and doesn’t pay the balloon payment. They start again on another one
If the value is less than the balloon payment, the customer would be well advised to hand the car back and buy a similar used one for the actual value.Back to the OP question, the loser is the finance business.
Traders, in some cases.
Particularly those asking stupid money for Euro5 ( even 6) BMW 330D/335d .
Some have been for sale since last year and because the dealer paid top dollar, they won't drop and , so stay for sale, losing more money, as even the most naive buyer thinks " bugger off"
Particularly those asking stupid money for Euro5 ( even 6) BMW 330D/335d .
Some have been for sale since last year and because the dealer paid top dollar, they won't drop and , so stay for sale, losing more money, as even the most naive buyer thinks " bugger off"
Edited by oceanview on Sunday 14th August 01:28
911hope said:
MDMA . said:
As above. Customer just walks away and doesn’t pay the balloon payment. They start again on another one
If the value is less than the balloon payment, the customer would be well advised to hand the car back and buy a similar used one for the actual value.I think customers buying non-specialist, mass-produced vehicles on finance plans and speculative traders looking for a quick buy and sell may be hurt in a correction. A lot of it seems to be supply chain issues which will settle eventually, leading to less overpricing of immediately available used vehicles. However in general, cars still seem a lot cheaper here in the UK, especially for the used market.
Was looking up what similar cars can cost in pricier markets like Singapore...new Porsche targa 4s is around $800k SGD there (£480k GBP) whereas 'only' £120k here. And they tend to scrap them after 10 years or so. So I think we have it pretty good overall with comparitively an abundance of used cars to choose from.
Was looking up what similar cars can cost in pricier markets like Singapore...new Porsche targa 4s is around $800k SGD there (£480k GBP) whereas 'only' £120k here. And they tend to scrap them after 10 years or so. So I think we have it pretty good overall with comparitively an abundance of used cars to choose from.
MDMA . said:
911hope said:
MDMA . said:
As above. Customer just walks away and doesn’t pay the balloon payment. They start again on another one
If the value is less than the balloon payment, the customer would be well advised to hand the car back and buy a similar used one for the actual value.People getting out of their monthlies and replacing with a used car.
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