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”.