Fears of 'sub-prime' loans on new cars prompt the possibility of more stringent PCP regulation

The Bank of England has confirmed that regulators are looking into further policing Personal Contract Purchase (PCP) car buying deals, as fears that ‘sub-prime’ car loans could put strain on economy growth.

PCP finance deals have become the largest car buying method in recent years, with more than 75% of all UK registrations being completed through such contracts. Despite this, a 2008-style financial crisis will not arise from this increased lending, according to the Finance and Leasing Association (FLA).

An article in The Telegraph reported that regulation is being considered for PCP deals, because increasing numbers of PCP contracts are being drawn up with consumers who cannot afford to fulfil them, similar to the ‘sub-prime' mortgages that caused the financial crisis of 2008.

A spokesman for the FLA said: “The Bank of England is looking to regulate responsibly; it wants to understand the impact on the economy.” However, it quelled fears that PCP loans could put a strain on the economy.

"PCPs are popular because people can afford it more than hire purchase," it said. "For many years, under UK/EU law, every credit deal has had to have affordability checks; they’re mandatory. Basic logic is if any lender wants to lend, it only makes commercial sense if the lender gets its money back.”

If the measures are introduced, a similar set of means and affordability tests would be implemented and the range of cars available to those on lower incomes would therefore be more limited.

The Bank of England’s Financial Policy Committee (FPC) announced after its March policy meeting that levels of consumer credit, which includes PCP contracts, “has been growing particularly rapidly. This could represent a risk to lenders if accompanied by weaker underwriting standards”.

It also announced that it would be more closely monitoring lenders’ assessments before offering the policies.

As new car registrations continue to break new ground in the UK, PCP deals have come to the fore as the main car buying method. Sceptics have doubts about the longevity and sustainability of the growth, as well as the longer-term impact on the used market of the flood of three-year-old used PCP cars, because bigger-selling models depreciate quicker due to the higher number of used examples already on the market.

The Society of Motor Manufacturers & Traders' (SMMT) director of communications and international, Tamzen Isacsson, said: “Finance offers an affordable and flexible way for motorists to buy a new car, with fixed monthly payments and APR that are generally lower than for personal loans. Car finance is governed by very strict rules, and anyone taking out a package will have the terms and conditions explained to them by the dealer and in writing.

"As with any major purchase, customers are advised to do their own research to make sure they are getting the best deal on offer, and one that is within their budget.”

Read more: 

PCP (Personal Contract Purchase) explained: how to get it right

The best PCP deals for £200 per month or less

Growing PCP sales lead to reduced used car values

Our Verdict

Ford Fiesta
Fiestas sold in Europe are ostensibly the same as those sold in America and Asia

The seventh-generation Ford Fiesta is the UK's best selling car, helped by frugal engines, handling verve and a big car feel

Join the debate

Comments
20

18 April 2017
Autocar - any chance you could do an article on PCP cars and insurance? Several horror stories exist about high prices, not being covered etc as technically you don't own the car. The insurance market needs to catch up which it will only do via media pressure.

 

 

 

2 May 2017
Debt's the new wealth. Britain's largely unpayable total student debt now stands at £86.2bn so who cares about a few billion more on ugly off-roaders and storecards?

18 April 2017
Hmmm... you have to wonder at the incompetence of the fools who run the finances of banks/lenders, it is all a bit late for worries, as long as you have a pulse these fools will give you a deal...I know quite a few people who have obtained PCP deals /bankloans/credit cards etc over the last couple of years, you could call them sub prime,more realistically skid row, LOL

2 May 2017
dougflump wrote:

Hmmm... you have to wonder at the incompetence of the fools who run the finances of banks/lenders, it is all a bit late for worries, as long as you have a pulse these fools will give you a deal...I know quite a few people who have obtained PCP deals /bankloans/credit cards etc over the last couple of years, you could call them sub prime,more realistically skid row, LOL

Except they dont! My son works in a new car dealership and he cannot complete roughly 1 in 5 sales because the buyer fails the credit rating requirements. It is a total fallacy that you'll get a deal if you have a 'pulse.'

But hey, it makes for a post and enhancement to urban myths, doesnt it?

2 May 2017
PCPs are just a means for manufacturers to shift overproduced cars - and at the same time exploit people who are unable to fund a new car by other means. The strategy seems to be to complicate and confuse (with lots of small print and often uncompetitive interest rates), so that many customers don't see beyond the £99 per month headline figure.
I don't like them!

2 May 2017
I had a conversation with a bank manager a few years ago when all this kicked off and asked him about credit card debts. His reply was that, with all the restructuring they do for the customer at enormous rates of interest, they make a fortune out of it. I'm sure this will happen with PCP's, too.

2 May 2017
autocar wrote:

As new car registrations continue to break new ground in the UK

Bank of England looking to regulate? No, no, no... haven't you heard - it's Brexit that will cause car sales to drop. All I ever read about prior to last years vote was how cars sales would fall away if the UK voted leave, yet I'm still reading that car sales are on their way up. Funny that.

PCP no different to other types of loans so can't see why BofE getting their knickers in a twist - if they'd been competent in the sub-prime department, we wouldn't be in the mess we are now, but my biggest gripe about how easy it is to buy a new car is the knock on effect of residuals.

I'm a cash buyer, but when I last looked in to PCP, the dealers were falling over themselves to tell me the GFV didn't really mean anything - it was designed so that there would be equity in the car when the lease ended and I could use that equity as a deposit on my next PCP deal and the world would be a wonderful place.

Whatever happened to that equity? I never hear it mentioned now. A car retains 40% of it's purchase price after 3 years and we're now conditioned in to thinking "That's not too bad". And not only do they stick to the GFV, I'm led to believe dealers will knock off all sorts of money for what amounts to normal wear and tear so you end up with less than the GFV.

2 May 2017
scotty5 wrote:

All I ever read about prior to last years vote was how cars sales would fall away if the UK voted leave, yet I'm still reading that car sales are on their way up. Funny that.

You know we're not leaving the EU for another 2 years right? Bit early to be making a call on any predictions.

2 May 2017
Depending on how hard the FCA and BoE want to look at dealer car financing, there could be lots of trouble ahead for manufacturers and dealers.
Due diligence and fair treatment of customers goes out the window as soon as dealers get a sniff of a sale, and they will push like crazy to shoehorm a customer into a PCP agreement. They specialise in capitalising on customer ignorance and confusion – and often outright lies – to get a signature on a contract.
Car buyers are very often too lazy or embarrassed to ask questions or are not aware of their rights, which presents dealers with an open goal to take them for all they've got.
At some point, the sticky brown stuff will hit the recirculating cooling device when enough customers realised they've been conned into something that is certainly not in their best interests. BoE regulation is going to protect the stupid and lazy from predatory selling tactics, which will simply shift the emphasis to personal leasing (it already is with some manufacturers and dealers), as leases do not have the same rights and restrictions as a PCP.

2 May 2017
disco.stu wrote:

Depending on how hard the FCA and BoE want to look at dealer car financing, there could be lots of trouble ahead for manufacturers and dealers.
Due diligence and fair treatment of customers goes out the window as soon as dealers get a sniff of a sale, and they will push like crazy to shoehorm a customer into a PCP agreement. They specialise in capitalising on customer ignorance and confusion – and often outright lies – to get a signature on a contract.
Car buyers are very often too lazy or embarrassed to ask questions or are not aware of their rights, which presents dealers with an open goal to take them for all they've got.
At some point, the sticky brown stuff will hit the recirculating cooling device when enough customers realised they've been conned into something that is certainly not in their best interests. BoE regulation is going to protect the stupid and lazy from predatory selling tactics, which will simply shift the emphasis to personal leasing (it already is with some manufacturers and dealers), as leases do not have the same rights and restrictions as a PCP.

My oh my, I do love an Expert!
Please have the decency and professionalism to not tar ALL dealers or indeed customers with the same brush!
Referring to buyers as 'stupid and lazy' and dealers as 'predatory' says a lot about the writer.
As a matter of note, any UK Main dealer offering finance is HEAVILY regulated by the FCA, whose main area of focus is TCF (treating customers fairly) and I believe this focus is far more concentrated on the motor trade than on any other trade, including loan companies (Wonga etc) and even the banks themselves.
There will always be the bad apples who will take the p*#s whenever the opportunity arises, I accept, but these are the exception, rather than the rule!
Rant over!
Thank you

Pages

Add your comment

Log in or register to post comments

Find an Autocar car review

Driven this week