Drivers face car loan crackdown to avoid fresh financial crisis
D rivers may face tougher affordability checks to qualify for car loans amid fears of a fresh financial crisis triggered by pay-as-you-drive deals.
The amount of money being borrowed to buy fresh cars has trebled over the past eight years to more than £30 billion and there are growing concerns over the lack of financial checks made on potential borrowers.
Motorists can be suggested loans worth more than their own salaries in a growing scandal which has echoes of the sub-prime mortgage boom which helped spark the global financial crisis.
The Bank of England on Friday confirmed regulators are investigating car financing arrangements which could lead to regulators enforcing tougher affordability tests, potentially similar to those used on mortgages.
Nine in ten fresh car sales are now financed by "individual contract plans" which can enable people on low incomes and poor credit histories to afford brand fresh top-of-the range cars.
Drivers pay a petite upfront fee and then a monthly "rental" before handing back the vehicles and upgrading after several years. The popularity of the finance schemes has soared in latest years.
The Telegraph has seen figures indicating that households with "stressed" incomes are a major force behind the rises, with a fifty four per cent increase in applications since 2014.
N ow financial experts are calling on City watchdogs to introduce tighter mortgage-style affordability checks for car financing deals to prevent consumers signing up for deals they may find they cannot afford in the future.
Jane Tully, director of outer affairs at the Money Advice Trust, said it was "essential" that all lenders – including car financiers – carry out stringent affordability checks before granting credit. She said: "Car finance and consumer credit more generally is thriving, and the Bank of England is right to be worried."
J ames Kirkup, director of the Social Market Foundation think-tank, added: "We are at risk of a situation where some people unfairly end up with inappropriate loans. Regulators and politicians need fresh thinking about how to ensure elaborate markets like this work better for consumers who are potentially vulnerable."
Last night MPs warned that car loans could lead to the next "sub-prime" financial collapse after the housing market crash.
It goes after previous predictions by Bank of England economists the industry could be "speeding" towards a potential "economic shock" if people are left incapable to meet their repayments and the value of cars fall as a result.
Steve Baker MP, a member of the Treasury Select Committee, said: "It’s a horrifying prospect to think that car loans are being securitised in the way mortgages were in the run-up to the crash. Our economy may well be too dependent on cheap credit and the Bank of England should urgently explore this problem.
"Living beyond our means is always attractive while it lasts but it’s doing no one any favours. Those tempting people to do so should truly be ashamed. Unluckily, scandals like this will further discredit the market economy.
"It’s unpreventable the [Treasury select committee] committee will want to take a look at what is obviously a fundamental issue of financial stability."
T he value of car loans in the UK almost trebled to £31.6 billion inbetween two thousand nine and two thousand sixteen according to the Leasing and Financing Association.
Some of the car-leasing loans have been packaged into investments called "asset-backed securities" and sold on to investors such as pension funds.
F alls in the value of this type of investment were a major reason behind the two thousand eight financial crisis. However this time the investments are backed up by cars instead of houses.
If people are no longer able to pay the loans en masse then the value of the assets can plummet in value, leaving the financial institutions holding the investments worse off. The Bank of England said it could not expose the extent of the banking system’s exposure to finance subsidiaries of car manufacturers for regulatory reasons.
A spokesman insisted the financial system is safer than it was before the crisis. Capital requirements, the amount of reserve money held by banks, is now ten times higher than it was before the crisis, it said.
D ata obtained by The Daily Telegraph exposes the request for car loans is rising fastest among low income groups whose finances are opened up and who are most likely to be hit by a unexpected downturn in the economy.
The number of applications for a type of car plan called "private contract purchase" by people classed as having "spread finances" has enlargened by fifty four per cent over the past two years, a database provided by the UK’s thickest credit checking agency Experian shows.
Consumers deemed to have opened up finances tend to have low incomes, unstable jobs, little savings and are often reliant on state housing or benefits, the rock-hard said.
Andy Wills, director of automotive and consumer data at Experian, said: “Manufacturers and lenders have recognised the appeal of these financial products. However, before coming in into a private contract purchase agreement it is significant for car buyers to keep in mind the cost of any financial agreement in the long-term.
"It is essential that providers ensure that the loan is affordable for the driver when they make the very first and final payments of the agreement.”
M eanwhile a separate mystery shopping exercise conducted by this newspaper found car financing firms appearing to encourage potential customers to spend over half their monthly disposable income on car contracts.
A salesman at one hard encouraged a customer, who said he had £400 total monthly disposable income, to apply for a deal on a Volvo V40 with heated seats and metallic paint. At a cost of £397-a-month it would have left the customer with just £3 a month to live on. To buy the car outright would cost £22,800.
Another rock-hard suggested a £372 per month deal on a "premium" Hyundai Santa Fey, which retails at £31,406, could be suitable.
The offers were subject to the shopper passing basic credit checks, but salesmen appeared certain that the deals were affordable.
Salesmen are incentivised by commission and are under no obligation to perform any tests other than credit checks to test whether customers can afford car financing, albeit some firms do insist on extra tests.
Firms have formulas to determine what level of credit delinquency is acceptable, however these vary inbetween firms and are kept a secret.
Drivers face car loan crackdown to avoid fresh financial crisis
Drivers face car loan crackdown to avoid fresh financial crisis
D rivers may face tougher affordability checks to qualify for car loans amid fears of a fresh financial crisis triggered by pay-as-you-drive deals.
The amount of money being borrowed to buy fresh cars has trebled over the past eight years to more than £30 billion and there are growing concerns over the lack of financial checks made on potential borrowers.
Motorists can be suggested loans worth more than their own salaries in a growing scandal which has echoes of the sub-prime mortgage boom which helped spark the global financial crisis.
The Bank of England on Friday confirmed regulators are investigating car financing arrangements which could lead to regulators enforcing tougher affordability tests, potentially similar to those used on mortgages.
Nine in ten fresh car sales are now financed by "private contract plans" which can enable people on low incomes and poor credit histories to afford brand fresh top-of-the range cars.
Drivers pay a puny upfront fee and then a monthly "rental" before handing back the vehicles and upgrading after several years. The popularity of the finance schemes has soared in latest years.
The Telegraph has seen figures indicating that households with "stressed" incomes are a major force behind the rises, with a fifty four per cent increase in applications since 2014.
N ow financial experts are calling on City watchdogs to introduce tighter mortgage-style affordability checks for car financing deals to prevent consumers signing up for deals they may find they cannot afford in the future.
Jane Tully, director of outward affairs at the Money Advice Trust, said it was "essential" that all lenders – including car financiers – carry out stringent affordability checks before granting credit. She said: "Car finance and consumer credit more generally is flourishing, and the Bank of England is right to be worried."
J ames Kirkup, director of the Social Market Foundation think-tank, added: "We are at risk of a situation where some people unfairly end up with inappropriate loans. Regulators and politicians need fresh thinking about how to ensure elaborate markets like this work better for consumers who are potentially vulnerable."
Last night MPs warned that car loans could lead to the next "sub-prime" financial collapse after the housing market crash.
It goes after previous predictions by Bank of England economists the industry could be "speeding" towards a potential "economic shock" if people are left incapable to meet their repayments and the value of cars fall as a result.
Steve Baker MP, a member of the Treasury Select Committee, said: "It’s a appalling prospect to think that car loans are being securitised in the way mortgages were in the run-up to the crash. Our economy may well be too dependent on cheap credit and the Bank of England should urgently explore this problem.
"Living beyond our means is always attractive while it lasts but it’s doing no one any favours. Those tempting people to do so should indeed be ashamed. Unluckily, scandals like this will further discredit the market economy.
"It’s inescapable the [Treasury select committee] committee will want to take a look at what is obviously a fundamental issue of financial stability."
T he value of car loans in the UK almost trebled to £31.6 billion inbetween two thousand nine and two thousand sixteen according to the Leasing and Financing Association.
Some of the car-leasing loans have been packaged into investments called "asset-backed securities" and sold on to investors such as pension funds.
F alls in the value of this type of investment were a major reason behind the two thousand eight financial crisis. However this time the investments are backed up by cars instead of houses.
If people are no longer able to pay the loans en masse then the value of the assets can plummet in value, leaving the financial institutions holding the investments worse off. The Bank of England said it could not expose the extent of the banking system’s exposure to finance subsidiaries of car manufacturers for regulatory reasons.
A spokesman insisted the financial system is safer than it was before the crisis. Capital requirements, the amount of reserve money held by banks, is now ten times higher than it was before the crisis, it said.
D ata obtained by The Daily Telegraph exposes the request for car loans is rising fastest among low income groups whose finances are spread and who are most likely to be hit by a unexpected downturn in the economy.
The number of applications for a type of car plan called "private contract purchase" by people classed as having "spread finances" has enhanced by fifty four per cent over the past two years, a database provided by the UK’s fattest credit checking agency Experian shows.
Consumers deemed to have spread finances tend to have low incomes, unstable jobs, little savings and are often reliant on state housing or benefits, the stiff said.
Andy Wills, director of automotive and consumer data at Experian, said: “Manufacturers and lenders have recognised the appeal of these financial products. However, before injecting into a individual contract purchase agreement it is significant for car buyers to keep in mind the cost of any financial agreement in the long-term.
"It is essential that providers ensure that the loan is affordable for the driver when they make the very first and final payments of the agreement.”
M eanwhile a separate mystery shopping exercise conducted by this newspaper found car financing firms appearing to encourage potential customers to spend over half their monthly disposable income on car contracts.
A salesman at one rock hard encouraged a customer, who said he had £400 total monthly disposable income, to apply for a deal on a Volvo V40 with heated seats and metallic paint. At a cost of £397-a-month it would have left the customer with just £3 a month to live on. To buy the car outright would cost £22,800.
Another rock hard suggested a £372 per month deal on a "premium" Hyundai Santa Fey, which retails at £31,406, could be suitable.
The offers were subject to the shopper passing basic credit checks, but salesmen appeared certain that the deals were affordable.
Salesmen are incentivised by commission and are under no obligation to perform any tests other than credit checks to test whether customers can afford car financing, albeit some firms do insist on extra tests.
Firms have formulas to determine what level of credit delinquency is acceptable, however these vary inbetween firms and are kept a secret.