Pop goes the balloon payment
Are bike buyers about to give up their newfound love affair with PCP?
I’m going to talk about something slightly different this week: PCP deals. I recently read in the financial pages that, in the US, banks are selling car finance deals as bonds. Take 10,000 finance contracts, bundle them together, and sell them to investors who will supposedly make their money on the interest paid by these bonds.
Only something’s going wrong. The default rate is way higher than it should be – it’s about 35%, actually. That’s right – more than one buyer in three is handing back the keys and the vehicle and walking away. The interest rates payable on these bonds has been going up. It’s now more than 8%. Why? Because the interest rate reflects the risk factor.
Does this ring any bells? Perhaps if I used the term ‘sub-prime’, it might. Yup, this is exactly what happened with mortgage bonds, to trigger the 2008 financial crash.
I know I’m a Cassandra, but I think this is serious. As I warned a year or more ago, inflation is now rising and interest rates are likely to follow. Wages are stagnating. A PCP deal is great value at (say) £130 a month for a superbike, but you don’t own the thing. You’re only renting it. At the end of the contract you must pay the large outstanding payment or – and this is what the industry likes – use the bike as the deposit on the next PCP deal, and start again.
I really doubt that many buyers salt away the extra cash to meet the final payment. Humans don’t work that way. The money’s gone on a holiday, new kitchen, whatever.
I think there will be more people rejecting final ownership, and probably also a new PCP deal, to buy a cheap used bike instead. And they will be cheap, because if the wheels do come off PCP, there will be a glut of used bikes on the market.