UK households borrowed a record £31.6bn last year to buy cars, up 12% on the year before, and 90% of private buyers used personal contract plans – PCPs – to make their purchases. This year the total borrowed is expected to exceed £40bn. Cash purchases for the legion of souped-up shiny 4x4s, SUVs and estate cars that populate Britain’s streets are almost unknown.
The boom in debt-financed car sales stems from the convergence of ultra-low interest rates and falling oil prices, which almost halved in 2014. Leasing companies, seeing how these developments made cars more affordable, embarked on a frenzy of marketing. Almost overnight this pushed the UK to the top of Europe’s car ownership rankings; it was the making of Land Rover, which found its rebirth as a glamorous brand helped as much by domestic sales as by its success in China and the rest of Asia.
A team inside the Financial Conduct Authority, the main City watchdog, has begun drawing up the terms of an inquiry into how much banks have lent to car buyers, and the likelihood of these institutions (many of them still struggling with the overhang of debts from the 2008 crash), getting their money back. High on the FCA’s checklist should be questions about the credit histories of customers who borrow to buy a car, and whether those with the lowest incomes can maintain payments running into thousands of pounds a year tied to three- or four-year contracts.
The inquiry should attempt to establish whether banks and the leasing firms they underwrite, having exhausted the list of private buyers with solid credit scores, turned to those with chequered credit histories to drum up new business via PCPs.
Like the sub-prime mortgage deals of the noughties that brought the world of finance to its knees, PCPs are an American import. For decades the “repo man” has been a figure of fear for blue collar workers across the US who fall behind with their payments and risk having their car repossessed.
In 1984, when Alex Cox’s punk comedy Repo Man aired in art house cinemas, it was shocking to see how vulnerable the lives of ordinary Americans were once the car payments began to mount up. If they lost their job, it wouldn’t be long before the car was towed away. Without a car they couldn’t find another job. Lives fell apart, and divorce invariably followed close behind.
At the time, a Brit watching Repo Man most likely had a degree of job protection, a welfare state to help with the mortgage if they found themselves out of work, and a car parked outside their house that might be ageing and slightly rusty, but was all paid for. Those who took out loans did so as a means to buy the car outright.
Of course the FCA inquiry is not concerned with a shift in the patterns of employment and finance that makes for a more precarious workforce. It will be concerned with the suspected mis-selling of leasing products it believes consumers either misunderstand or are available more cheaply on the high street.
The review, due to be published next year, will more than likely come to nothing. Car leasing has a large fanbase of customers who consider themselves much better off than they really are. They can secure a brand new car stuffed with the latest comforts and gadgets for a payment every month that is the same as someone paid for a whole loan 20 years ago. Free breakdown cover and warranty are thrown in, which means the headache of arranging and paying for repairs evaporates.
For many people with poor credit records, a PCP is likely to be the only way they can borrow a sizable sum of money
For many people with poor credit records, a PCP is likely to be the only way they can borrow a sizable sum of money. That is partly because the loan is arranged against a tangible asset, and partly a reflection of a regulatory environment that critics say allows people with fragile incomes to bypass scrutiny.
It is this last point that the Bank of England is concerned about. Its last major report on the economy warned that a sharp rise in all forms of consumer credit was a worry and would be monitored closely.
The market for car loans is only a fraction of the mortgage market – in the US, $1.1tn v $14tn – and car companies are not banks: they are not systemic risks. Yet without car sales, growth in GDP and wages and all the other standard measures of economic progress stand still.
This highlights the Bank of England’s difficult balancing act in regulating an economy dependent on consumer spending where debt is a large element for an important minority of households, especially millennials and young families with constrained budgets.
Keep interest rates low and regulations loose, and watch the economy grow. Or tighten regulations, and watch the economy slow. Worse for regulators, there would also be a backlash from a nation of drivers who have come to love the upgrades – every three years – to the massive piece of tin outside the house as much as they have the annual upgrades to their smartphones.