Diesel drivers face ‘time bomb’ on lease deals if car prices dive

THE number of cars being bought on finance deals has hit a record high as more than a million drivers used them in the past year, industry figures said.

The figures, from the Automotive Fleet Leasing Association, will exacerbate fears of a debt trap should irresponsible lending combine with a fall in the value of diesel cars and a general economic downturn.

Watchdogs are concerned that reckless lending is behind the boom and the Financial Conduct Authority is now investigating whether stricter affordability checks are needed to protect borrowers.

The so-called personal contract plans (PCPS), now fund nine in every 10 new car sales and enable people on low incomes and poor credit histories to drive new, top-of-the range vehicles.

However, experts warn that drivers of leased diesel cars face a negative equity “time bomb” amid predictions that a push for improved urban air quality will see their value plummet as owners face higher taxes to drive and park.

Diesel vehicle prices fell 19 per cent in Germany last month after similar action was discussed.

It is thought that around 40 per cent of the sales in Britain made under PCP arrangements were of diesel cars and the Finance and Leasing Association (FLA), which represents car finance firms, yesterday admitted a dramatic fall in diesel car prices could leave those who need to terminate leases, when less than half way through the contract, owing money.

Under PCPS drivers pay a small advance fee and then a monthly “rental” before handing back the car and upgrading after several years. Those who cancel early must repay the difference between what they owe and the car’s value.

Adrian Downey, of the FLA, said: “The amount you owe goes down in a straight line but car values are not like that. The value of the vehicle, if you want to sell at the very early part of your loan, might not be worth as much as what you owe.”

Alex Buttle, a director at car-buying website Motorway.co.uk, said: “A fall in diesel prices is a ‘time bomb’ which car finance firms are not prepared for...i personally would not buy a diesel car again. Things are only going to get worse once the anti-diesel policies come in.”

A spokesman at Go Compare, a price comparison service, said drivers could be hit with a “perfect storm” if falling diesel car prices coincide with an economic downturn. “Being in negative equity is a disaster as it can damage your credit rating, lead to county court judgments and bankruptcy,” he said.

“Recent diesel policies have likely caused hundreds of thousands of people to panic, [we] are probably going to be seeing offers and deals on diesel cars as dealers try to get rid of them.”