The young driver walked into the Audi showroom and gazed at the gleaming new cars. They looked a million dollars, but unfortunately the 24-year old driver was unemployed and didn’t expect he’d qualify for a loan to buy a new model. He was wrong.
Within minutes, a salesman says he’s confident that a new Audi A1, worth more than £15,000, could be the young man’s. Spend £215 a month, for 48 months, and he can hit the road. And after a final payment of nearly £7000, the car is his for keeps.
Despite being unemployed, the process of securing a loan to own the car was predicted to be straightforward.
A salesman says not having a job won’t make any difference. He explains: “We drop it down to the finance company, they’ll do a credit check on you. It’s not a case of you not having a job today and having a job tomorrow. We just need to see what the finance company says.”
However, the young man was an undercover reporter for the Daily Mail. He was one of a team that visited 22 dealerships. And the findings were prompted the question: is it too easy to get a car loan?
How popular is car finance?
Gone are the days when motorists would scrimp and save to afford a new car. And you don’t need to be on first name terms with your local bank manager. Now it’s possible to take out a special loan from car makers’ own finance divisions.
These loans are devised to make things as affordable as possible – on paper at least – for consumers. The Society of Motor Manufacturers and Traders estimates that about 80 per cent of the 2.69 million new cars sold in the UK are bought using the most popular finance plan – the personal contract purchase (PCP).
What’s the problem with too much car finance?
The undercover report conducted by the Daily Mail did not see the ‘car buyers’ subjected to credit checks. Had they undergone that step, the car manufacturers involved say they may not have qualified for a loan.
However, in general terms, the Bank of England is warning that UK drivers owe a staggering £58 billion on car finance. That’s an increase of 15 per cent over last year.
And if the value of used cars falls, drivers and banks risk being left out of pocket. That’s because the most popular finance deals are typically based around calculations of how much a car will be worth in three years time. Get those predictions wrong, and both parties can fall into negative equity.
What could wrong-foot the predictions?
Experts say the bubble could burst if too many cars flood the used car market. With so many new models sold on three-year deals, there are already huge spikes in the volume of models entering the used car market. Glass’ Guide, which monitors car sales and forecasts car values, says there have been times when popular models, first sold in 2013 or 2014, have threatened to destabilise the market. In 2016, the supply of city cars, like the Toyota Aygo and VW Up, rose by 80 per cent. Crossovers, such as the Nissan Qashqai, grew by 76 per cent. If there was not strong enough demand for these used models, values would fall.
Why do car makers offer finance?
The rise of car finance has helped fuel sales of new and used models for car makers. Brands with a premium image that have cars which fall in value slowly can work out to be the same cost to finance as cheaper, mass-market models that drop in value faster.
According to the Financial Times, Audi, BMW, Land Rover and Mercedes have seen sales surge. Data from IHS Markit suggests Mercedes has doubled its sales since 2010.
At the same time, finance products like a personal contract purchase (PCP) tend to increase brand loyalty. The car maker knows the timings of customers’ loans and is able to target them with another sale. In addition, because owners are worried about invalidating their new car warranty, they tend to keep returning to the dealer that sold the car for servicing. For the car dealer, it means repeat business and an easy way to keep the relationship with their customer.