Currently reading: Bank of England looks to regulate PCP car finance deals
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.

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stumpys182 3 May 2017

The vast majority of PCP

The vast majority of PCP business that goes through our branches (yes I am one of the devious, lying, preying dealers referred to earlier)are based on a simple profile of one payment up front, followed by 24-48 payments, then a GFV. For example, we will do a fair few '£189 deposit, £189 p/mth' type deals. The reason we try to steer customers towards this type of profile is to discourage them putting down huge deposits that they are NEVER going to get back by way of equity at the end of the term. In the worst case scenario, if the car is worth less than the GFV, they have the right to walk away (subject to condition and mileage etc) with no further obligation to that vehicle. The dealer would always be able to find the equivalent to one months payment to use as deposit for the customer on the next car one way or another. This is a far better situation than being 3yrs into a 5yr agreement and being in negative equity, as that would force the customer to either keep the car longer than they may want, or if desperate, to 'lump and bump' the negative equity onto another car loan. The whole idea of PCP is that it gives a lower payment (more affordable?) over a shorter period (less commitment?) than an equivalent HP product. That's why it is popular with so many buyers. The GFV risk is with the lender, not the customer. Responsible lending is the responsibility of the dealers and finance houses and although not everyone will abide by the rules, thankfully, the majority of franchised dealers do, as the FCA monitoring is so stringent, they cant afford not to. We're not all thieving b#stards you know!
disco.stu 3 May 2017

stumpys182 wrote:

stumpys182 wrote:

The reason we try to steer customers towards this type of profile is to discourage them putting down huge deposits that they are NEVER going to get back by way of equity at the end of the term.

Car sales roles are accredited by the FCA on a non-advisory basis, meaning you are specifically not allowed to steer a customer towards any sort of payment profile. You are required to present the options and allow the customer to make their own decision in their own time.

You have no idea what the customer's real financial position is, so you have no right to tell them that they should be taking more on your finance plan instead of putting down a larger deposit. That is for them to decide based on their own circumstances and desired outcomes. Many people actually prefer to put in more cash and pay less per month (and therefore less interest overall). The money is still going out of their account either way, so the argument that they are "NEVER going to get it back" is irrelevant and misleading.

PCPs create a far more significant negative equity issue than an HP or personal loan during the term, as so little of the loan is being repaid during the term. That makes the situation worse for those people who are desperate or need to settle up early.

Spanner 3 May 2017

If you can do basic maths

It is easy to get a pcp deal that stacks up better than putting in your own capital. On some cars the inducements to buy are high. Good thing too. Why have a banger paid for out of your own savings when you can have a new car on cheap finance and hold on to your hard earned savings?

But you need to be able to do basic maths to make it work. Many can't.

These days having a nice car and being well off are not intrinsically linked. It's quite levelling really.

Finance is already heavily regulated, but I find it weird you can buy a £50k car on tick without proof of earnings. Maybe more regulation is the answer.

HHX621 2 May 2017

Commercial Private Leasing CPL

That's the future of motoring. Meaning? Companies that's simply would be sponsoring your private vehicle. Just as your vehicle would be a cab. Probably not due until 2050 or so.