brrrmmm, brrrmmm

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There’s nothing quite like a new car. The smell of the leather seats and the feel of an untouched steering wheel. Crisp, precise controls and fresh carpets. Lovely. Last year, British households borrowed over £30bn to upgrade their car and sales of new motors surged to a twelve-year high. The US love them even more and their total auto loan now tops $1trn. Ten years ago consumers were bingeing on credit card debt and look where that got us. Have we now merely dropped the ‘d’ and is a credit car crash just around the bend?

Car loans have been around forever but the rise in Personal Contract Purchasing (PCPs) is a relatively recent phenomenon. PCPs are a hybrid form of lending and sit somewhere between a loan and a lease where the customer pays a relatively small deposit together with monthly payments. Usually operating on a three-year basis, at the end of the term they can then either hand the car back or buy it outright. Unsurprisingly, swapping your old jalopy for a brand new one every couple of years has proved extremely popular and all the big players now have their own lending arms to finance the deals. As an example, Volkswagen finances over half of its car sales on PCPs.

But warning bells are ringing and the risks posed by PCPs are now being compared to those once threatened by subprime mortgages. Recent investigations have highlighted the unwelcome return of cleverly, or cunningly more like, disguised ‘ninja’ loans – no income, no job, no assets. Financial reforms within the mortgage industry post-2008 have now seen yield-hungry financiers target those same individuals as no customer protection or product control yet exists. In an ominously familiar pattern, auto loans have been diced, sliced and bundled with better quality loans into opaque asset-backed securities and packaged as secure and steadfast. Triple A, anyone? Contrary to this, car loan 90+ day arrears are at an all-time high and repossessions on the rise.

Admittedly the sums both here and in the US are much smaller than in the housing market but, notwithstanding this, the fallout from the bankruptcy of an organisation heavily leveraged in PCPs could easily impact the overall financial system. Again. Furthermore, the worry is the rise of car loan industry is indicative of a much bigger problem. Total customer debt, £200bn in the UK, is now past the 2008 peak and pressures on household finances are building. And in terms of anniversaries, today just happens to be the 30th birthday of the infamous ‘Black Monday’ when on the 19th October 1987 stock markets around the world crashed by as much as 45%, a level not seen since 1929. Let’s hope the cylinder-head gaskets don’t blow anytime soon. Parp, parp.