Warning over the collapse of £30bn car loan debt deals

A FALL in used car prices and a crackdown on high-polluting diesels has set alarm bells ringing that Britain’s car finance market could be about to slump.

Two of the world’s biggest credit agencies have issued warnings about the health of loans taken out by car buyers to snap up brand new vehicles for low monthly payments.

A Money Mail investigation found drivers on minimum wage could afford a £19,000 Mazda sports car.

Just as with mortgages, these loans are bundled up and sold as multi-million-pound investments to giant funds. Around £5.8bn of deals were sold on last year.

But if consumers stop buying cars, or the value of vehicles starts to fall, it threatens the health of these investments.

Analysts at credit rating agency Fitch have warned that a crackdown on diesel cars might lead to a ‘rapid and large shift in demand’ which could hit the used car market.

There was a shock fall in demand for new cars last month, when sales dived at their sharpest rate since 2010 – falling by 20pc from March, down to 152,076. Diesel sales dropped 27.3pc.

A particular concern to the credit agencies are personal contract plans (PCPs) where drivers effectively lease the car for a set time and pay a monthly fee.

At the end of the deal, the car will still be worth a certain amount on the second-hand market. Owners use this money to pay off the rest of their contract and put anything left towards a deposit for another new vehicle.

Credit agency Moody’s warns that these types of deals are more risky than standard car loans because if the price of secondhand cars starts to fall then buyers will have smaller deposits and won’t be able to buy new cars. It warned that of the recent deals it had analysed, there were higher numbers of PCP deals bundled in to investments with other types of less-risky car loans.

Some issuers, including Volkswagen, are trading bundles which are more than 90pc made up of PCPs. It echoes the way low-quality US mortgages were sold with good loans before 2008, triggering the financial crisis when it emerged most were worthless.

It also warned that the value of deposits that PCP customers were able to put down for a new car had also been shrinking.

The agency added that few customers were getting into financial difficulty with car finance at present – but this could change.

The report by Fitch suggests that consumers are more than 30 days behind on their payments for 0.75pc of car loans in European securities. Meanwhile, 0.24pc of the loans were written off as losses – up from 0.18pc a year earlier.

Moody’s said that the City watchdog was now taking a keen interest in car finance. ‘Unchecked PCP growth has raised regulatory concerns on the back of strong growth,’ it said.

Labour candidate Wes Streeting, a member of the Treasury Select Committee during the last Parliament, said the car finance market should be investigated as soon as possible. ‘People want easy access to finance when buying a car, but there are serious concerns about whether loans are being issued responsibly,’ he said. ‘It would be even more concerning if bad loans are being bundled together and traded as securities – just as sub-prime mortgages were. Given the echoes of the sub-prime mortgage bubble, this is something the Treasury Committee should look at as a matter of urgency.’

Adrian Dally of the Finance And Leasing Association said that used car prices had behaved consistently in the same way since the 1930s and there was unlikely to be a sudden crash. ‘The prices are very, very predictable,’ he said. ‘We have a very high degree of confidence in the asset and the risk attached to the consumers.’