Crisis fears as £50m of ‘reckless’ vehicle loans are written off
MPs demand industry comes clean on defaults
FEARS were mounting last night that reckless car loans are risking another financial crisis.
Investors in The Car Finance Company – Britain’s leading sub-prime car lender – said they had written off £50million after the number of customers falling behind on payments more than doubled in a year.
Politicians are now demanding that the entire motor industry ‘ urgently’ discloses how many drivers are defaulting so the risk to the economy can be assessed.
The developments came after the Daily Mail yesterday revealed how car salesmen were tempting young drivers into huge debts by offering them new vehicles without them having to pay any money up front.
Dealers are offering cars worth up to £20,000, even when customers say they are unemployed, on minimum wage or have bad credit histories.
If drivers default on payments, they face having the car repossessed and court orders that wreck their finances.
And there are serious concerns that if increasing numbers of people default, it will cause a domino effect resulting in another credit crunch.
About nine in ten of all cars bought in the UK on finance are now personal contract purchase (PCP) deals.
These involve customers paying for a portion of the car’s value over three to five years. They can then pay a ‘balloon’ lump sum at the end of the term if they want to own the car, based on its projected value. Most drivers instead hand the car back and take out a new contract.
The Mail’s findings came amid chaos at The Car Finance Company, which specialises in securing car loans for those who have bad credit. They advertise interest rates of as much as 49.6 per cent. Private equity investors Pine Brook spent £50million on the business just two years ago and profits were recorded as £400,000 in 2015. But last year, impairments – the amount of debt people are struggling to pay back – rose by 371 per cent to£11.6million. Arrears – when a driver falls behind on repayments – rose from 8.2 to 18.4 per cent. The company subsequently suffered a loss of £17.8million.
There is now huge pressure on the car leasing industry to reveal the number of people in arrears and defaulting on loans.
Despite the surge in drivers taking out finance deals, no official data showing how many people fail to pay is available. This means Parliament and debt charities cannot properly assess the level of risk in the car loan industry.
If the number of people defaulting on their car loans is rising, this could have devastating consequences for the economy.
Investors who buy car debt rely on secondhand car prices remaining stable. If drivers default on payments, their cars can be repossessed and resold.
However, the increase in three to five-year PCP deals means the secondhand car market is being flooded, resulting in the value of used cars going down. The Bank of England warns that banks risk losing as much as £1.7billion if used car values keep falling.
This could lead to job losses and banks having to cover their losses elsewhere, driving up costs for consumers.
Last night, MPs and car finance experts warned the build-up of debt will lead to a crisis. Baroness Altmann, finance expert and former pensions minister, said: ‘The car finance indus- try is extremely worrying. These are the mistakes that led to the financial crash in 2007 but in a slightly different format.
‘Default rates need to be published urgently so we can assess what is happening. This is reckless lending which shouldn’t have any place in a modern economy.’
Alex Buttle, of car-buying website Motorway.co.uk, said: ‘It feels like the brakes have come off car finance lending – the lenders are out of control and the industry looks in crash territory. There is a car finance disaster brewing.’
The Car Finance Company said it only offered cars on traditional hire purchase – where a customer pays off the total value of their car in monthly instalments – rather than PCP deals.
A spokesman added: ‘ The car finance industry was worth over £ 40billion last year and we represent less than 0.25 per cent of that.’ Pine Brook declined to comment.
Has a car loan wrecked your finances? Email investigations@dailymail.co.uk