Bank in new alert over car finance dangers

An unexpected fall in new car sales is forcing dealers to offer increasingly high-risk finance deals, Bank of england economists warn today.

salesmen are being told by manufacturers to offer bigger discounts to reverse the decline. But economists fear the car finance market is now dangerously exposed to an economic downturn. it is the latest warning that the finance bubble that has spurred the sale of new cars to record levels may be about to burst.

Demand for new vehicles has dropped sharply amid a squeeze on living standards, forcing the £58billion car finance industry to offer special deals to lure buyers. A Mail investigation revealed cars worth up to £20,000 being offered without a deposit, a buyer being told how to write a credit check form to ensure approval and a dealer trying to sell a £15,000 Audi to a man who said he was out of work.

the Bank said: ‘Although weakening, UK new car sales remain at historically high levels. that is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks... [making] the industry increasingly vulnerable to shocks.’

Car finance has exploded since the economic

‘Increasingly vulnerable’

crisis, fuelled by personal contract purchase deals (PCPs) which appear to give customers a risk-free way of buying a new car on the cheap.

the buyer puts down a deposit and makes monthly payments for three or four years. they can then pay a lump sum if they want to own the car, based on its projected second-hand value. Most drivers instead hand the car back and take out a new contract.

After years of surging growth, there are now signs PCPs may have run into trouble. they depend on the value of used cars – and there are indications these have fallen, the Bank says.

new car registrations are expected to fall 2.6 per cent this year and a further 4.1 per cent in 2018, according to the society Of Motor Manufacturers and traders. At the same time, makers are being hit by the fall in the pound, which has driven up the cost of imported cars and parts.

Adrian Dally of industry body the Finance and Leasing Association said there was no cause for concern. ‘in an extremely competitive market, it’s good to see operators continuing to react by making offers attractive to buyers,’ he said.