£50m of ‘reckless’ car loans are written off: MPs demand industry comes clean on number of defaults amid increasing fears of crash
Published: 00:38 GMT, 4 July 2017 | Updated: 12:37 GMT, 4 July 2017
Fears were mounting last night that reckless car loans are risking another financial crisis.
Investors in The Car Finance Company – Britain’s leading sub-prime car lender – said they had written off £50million after the number of customers falling behind on payments more than doubled in a year.
Politicians are now demanding that the entire motor industry ‘urgently’ discloses how many drivers are defaulting so the risk to the economy can be assessed.
The developments came after the Daily Mail yesterday revealed how car salesmen were tempting young drivers into huge debts by offering them new vehicles without them having to pay any money up front.
No deposit: Critics have condemned the surge in personal; contract purchase deals on cars
Dealers are offering cars worth up to £20,000, even when customers say they are unemployed, on minimum wage or have bad credit histories. If drivers default on payments, they face having the car repossessed and court orders that wreck their finances.
And there are serious concerns that if increasing numbers of people default, it will cause a domino effect resulting in another credit crunch.
About nine in ten of all cars bought in the UK on finance are now personal contract purchase (PCP) deals. These involve customers paying for a portion of the car’s value over three to five years. They can then pay a ‘balloon’ lump sum at the end of the term if they want to own the car, based on its projected value. Most drivers instead hand the car back and take out a new contract.
The Mail’s findings came amid chaos at The Car Finance Company, which specialises in securing car loans for those who have bad credit. They advertise interest rates of as much as 49.6 per cent.
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Private equity investors Pine Brook spent £50million on the business just two years ago and profits were recorded as £400,000 in 2015. But last year, impairments – the amount of debt people are struggling to pay back – rose by 371 per cent to £11.6million.
Arrears – when a driver falls behind on repayments – rose from 8.2 to 18.4 per cent. The company subsequently suffered a loss of £17.8million. There is now huge pressure on the car leasing industry to reveal the number of people in arrears and defaulting on loans.
Despite the surge in drivers taking out finance deals, no official data showing how many people fail to pay is available. This means Parliament and debt charities cannot properly assess the level of risk in the car loan industry.
Huge interest: Finance companies are targeting motorists who have bad credit ratings
If the number of people defaulting on their car loans is rising, this could have devastating consequences for the economy.
Investors who buy car debt rely on secondhand car prices remaining stable. If drivers default on payments, their cars can be repossessed and resold.
However, the increase in three to five-year PCP deals means the secondhand car market is being flooded, resulting in the value of used cars going down. The Bank of England warns that banks risk losing as much as £1.7billion if used car values keep falling.
This could lead to job losses and banks having to cover their losses elsewhere, driving up costs for consumers.
Last night, MPs and car finance experts warned the build-up of debt will lead to a crisis.
Baroness Altmann, finance expert and former pensions minister, said: ‘The car finance industry is extremely worrying.
‘These are the mistakes that led to the financial crash in 2007 but in a slightly different format.
‘Default rates need to be published urgently so we can assess what is happening. This is reckless lending which shouldn’t have any place in a modern economy.’
Alex Buttle, of car-buying website Motorway.co.uk, said: ‘It feels like the brakes have come off car finance lending – the lenders are out of control and the industry looks in crash territory. There is a car finance disaster brewing.’
The Car Finance Company said it only offered cars on traditional hire purchase – where a customer pays off the total value of their car in monthly instalments – rather than PCP deals. A spokesman added: ‘The car finance industry was worth over £40billion last year and we represent less than 0.25 per cent of that.’ Pine Brook declined to comment.
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Finance firms offering loans to drivers with bad credit – at 49% interest
Car finance companies are charging vulnerable drivers interest rates of up to 50 per cent, the Mail can reveal.
‘Sub-prime’ dealers targeting drivers with bad credit – after bankruptcy or a County Court Judgment has been issued – can expect a return of as much as £20,000 on a £10,000 loan. Many boast of being able to secure finance for those who have been refused credit at high street lenders.
But the number of people failing to keep up their repayments is not collated by the industry regulator, the Financial Conduct Authority [FCA], leading to fears consumer lending is out of control.
The Car Finance Company, based in Portsmouth, describes itself as ‘an alternative finance lender’ and specialises in ‘bad credit car finance’. The firm advertises interest rates of 49.6 per cent on its website for customers who want to take out a loan without paying a deposit.
A customer taking out a £10,000 loan over four years would be required to pay back £20,010, according to its online calculator.
Similarly, Glenside Finance, based in Fareham, Hampshire, offers customers who describe themselves as having a credit rating of ‘very bad’ the chance to take out car loans of £10,000 over four years. However, they face rates of 49.34 per cent.
The companies target those with bad credit – who are unable to obtain finance elsewhere – and make a profit by charging exorbitant interest rates.
They say this is justified because they are taking a gamble on the customer. Some dealers, such as Glenside Finance, offer loans of up to £75,000. The firm’s publicity material states: ‘Owning your dream car needn’t be a financial nightmare.’
CarFinance 247, one of Britain’s largest online car finance websites, also offers ‘bad credit car finance’ deals to those who have previously been in arrears or defaulted.
While offering a lower rate of 27.4 per cent, a forum on the site gives advice to those hoping to take out finance.
A potential customer wrote: ‘I’ve defaulted on all of my finance agreements and I can’t get car credit anywhere. Can you help?’ A CarFinance 247 employee replied: ‘If you’re after car credit you have come to the right place. Here at CarFinance 247 we specialise in helping people with poor credit records.’
The Car Finance Company said it was committed to responsible lending.
Jim Pike, of Glenside Finance, said the average rate his company lent money at was 30 per cent, adding: ‘We are a simple, honest, well-established finance company.’