Will coronavirus see the wheels come off car finance?

But the most popular option is to use equity built up in the car – such as by driving  less miles meaning it is worth more than expected value at the end of the term – and using this to begin the process all over again.

A HP agreement covering the vehicle’s new price would usually be over a longer term, say five years. With the same deposit and interest rate, this would mean monthly repayments of almost £500.

No wonder motorists saw PCPs’ attractions: they pay less and get a new car after three years. Today 90pc of new car sales are PCP deals. They have also been great news for the car makers, fuelling demand for new vehicles. 

But PCPs require a constant churn of people rolling into new contracts, as well as a strong market for used cars, as vehicles coming off the deals enter the secondhand market.

As long as prices are high in the used market, then the value of cars coming off PCPs are also high. But a glut of secondhand cars means a three-year car coming off a PCP could be worth less in the market than was predicted when the deal was agreed.

For our XY Motors example, instead of being worth £18,000 after three years, if dealers’ forecourts are packed with too many unwanted cars, then it might only be worth £15,000, leaving the lender who financed the PCP facing a £3,000 loss.

With millions of cars in the UK are sold each year via PCPs, a collapse in secondhand cars could cause the whole system to fail.

Coronavirus is raising the prospect of cash-strapped motorists having to hand back cars they can no longer afford, so it’s easy to see why the automotive industry welcomes the FCA’s action.

However, the whole system is “very finely balanced” warns Birmingham University’s Professor David Bailey, a car industry expert.

“PCPs have propped up the market for years and depend on no upsets so car companies can manage supply and demand,” he says. “But coronavirus’s impact is unprecedented.”

PCPs have been so successful that they have moved into the used car market where about 30pc of deals now use them.

“PCPs have keep champagne corks popping for years but the question is how sustainable are they in the long run,” adds Bailey. 

His view is backed by Graham Hill, a car finance expert and former president of the National Association of Commercial Finance Brokers, warned of the dangers of PCPs.

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