Car payment relief introduced as vehicle loan industry faces crisis
CAR payment holidays have been introduced by the financial regulator, as drivers were told their vehicles won’t be repossessed if they struggle to keep up with the payments.
The Financial Conduct Authority yesterday ordered the automotive industry to offer breaks on car loans to those in financial difficulties because of the coronavirus lockdown. Car finance companies were told that three-month payment freezes should be offered to those most in need. The move comes amid fears a crisis is brewing in the UK’S £75billion car loan industry, with 6.5million vehicles on finance deals.
However, motorists have been warned that taking a payment holiday on car leases could ramp up the overall financing cost. The Finance & Leasing Association (FLA) said drivers ought to be careful about taking payment holidays, as interest would still accrue.
Adrian Dally, head of motor finance at the FLA, said: “People need to understand what this means. The FCA is not requiring members to adjust interest rates.” Mr Dally said payment holidays were “just the starting point” of ways the industry can ease pressure on consumers. Other options could be renegotiating the length of deals, lower interest rates or waivers. In the past three weeks the FLA has received 121,000 inquiries about relief on car finance deals, with a 1,400 per cent rise on the normal level in the first week after the lockdown began.
The FCA’S proposals – which are expected to be finalised on April 24 – also included a warning to the car industry not to boost their profits by taking advantage of customers in trouble. The regulator said it “will expect firms to act fairly where terms are adjusted”.
The scheme comes amid a collapse in sales of cars, which crashed 44 per cent last month, raising concerns about the health of the car finance sector.
Car manufacturers’ finance arms as well as traditional lenders have huge exposure to a slump because of personal contract purchase (PCPS) agreements, where customers effectively “rent” a car usually for three years.
During this period their payments cover the depreciation between the car’s initial sale price and its used value when the deal ends. About 90pc of new cars are sold via PCPS.
However, the system depends on a second-hand car market with high residual values. If there is a surge in nearly new cars entering the secondhand market because people are handing back the keys on vehicles they cannot afford or their cars are repossessed, the system will crash.
A glut of cars in the used market will lower prices, and make new cars being bought in PCPS more expensive. This is because of the bigger gap between new car prices and those in the secondhand market which PCP payments have to cover.
Graham Hill, a car finance expert and former president of the National Association of Commercial Finance
Brokers, warned of the dangers of the system.
He said: “I’m a fan of PCPS as they get people into newer cars. The problem is they hand control to the industry, not consumers, and car dealers can’t help but take advantage.”