Costly car loans may drive us all off a cliff

IS Britain’s car loan boom the bubble that could cause the next financial crash after a record £31.6billion was borrowed last year to buy vehicles?

This was up 12 per cent on the year before, while figures show drivers are buying 3,000 cars a day on finance.

The worst bit is that drivers are typically opting for the most expensive type of plan.

Almost nine in ten car loans taken out today will be personal contract purchase (PCP) arrangements.

These lease contracts allow the driver to buy their car at the end of an agreed term.

Typically, you put down a deposit and pay a fixed sum to the loan provider each month. But this won’t cover the full cost of the car. If you want to buy the car at the end of the loan term, you make a hefty lump sum payment to cover the difference.

As an example, you might put down a £1,000 deposit on a £10,000 car and agree to pay £5,000 over three years.

If you want to buy the car outright you have to find the remaining £4,000, or ‘balloon payment’. If the value of the car is higher than £4,000, you can use the difference as a down payment on a new model. The attraction is a lower monthly bill than traditional hire purchase deals. But the numbers behind the two types of loan show that borrowers typically pay hundreds of pounds more overall if they opt for a PCP deal. So why is this a crisis? Behind the scenes, the loans are being sold to hedge funds and insurance companies as investments. And demand is booming. Money Mail research found manufacturers packaged together £5.7billion of car loans to flog as investments last year – more than double the year before. In some cases, these ‘securities’ contain 42,000 loans – of which more than nine in ten are PCPs. This is exactly the type of deal banks sold in the run-up to the financial crisis in 2008.

Then, casino bankers packaged billions of pounds worth of mortgages – good and bad – and flogged them as safe investments. These mortgage-backed securities were so widely sold that when the riskiest loans went bad, the financial system was dragged down.

Could the same happen with car loans? At first glance, it seems unlikely. Only 1.13 per cent of car loans in these bundles went bad in November, up slightly from 0.83 pc the previous November.

But in the mid-2000s, the mortgage bundles being flogged also had low default rates – and looked safe as, well, houses.

Even the Bank of England singled out the car finance boom as one of the main reasons that household borrowing – excluding mortgages – is rising at the fastest pace in 11 years.

What worries me most is that many families are getting accustomed to record low interest rates and are now getting into heaps of debt again.

It may only take one shock – an interest rate rise, for instance – to cause millions to struggle. That’s when the folly of borrowing huge sums for a new car every three years could come home to roost.

ATM answer

THANKS for the responses to last week’s cash machine puzzle.

Jeaneatte Littley, from Kent, raises the prospect that our reader’s £200 might have popped out while he was in the branch complaining that the ATM had left him out of pocket.

Around 15 years ago, Jeaneatte went to withdraw cash from an Abbey National ATM in Maidstone and found £100 hanging out.

She waited in vain for the previous customer to return before handing in the notes to the branch receptionist. ‘She proceeded to interrogate me as if I had done something wrong,’ says Jeaneatte. ‘I said I wanted the bank to trace the owner of the money and told her which machine it was and the time I had taken my money, so it would be easy for them to trace.’

Despite leaving her details, Jeaneatte heard nothing until she returned to the branch a few weeks later.

‘They said there was no way the owner could be traced, even though they knew the place and time, so they had put the money into a “special” account. In other words, the bank kept it,’ she says.

When I questioned Santander, which now owns Abbey, it said around ten years ago it introduced a ‘trace function’ that enables the bank to reunite customers with uncollected cash if a passer-by such as Jeaneatte hands it in.

Quite why that couldn’t have been done anyway is a mystery.