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Could PCP become the new PPI?

The UK’s total consumer debt bill is close to £200bn and is growing at its fastest rate for 12 years.  The Bank of England is afraid to increase interest rates, because of the memories of the 2008 financial crisis, when the lending of subprime mortgages triggered a catastrophic domino effect as over stretched borrowers defaulted on the loans.

There are some troubling parallels with 2008 and what is happening in today’s credit-fueled car market.

Sales of new motors have surged to a 12 year high.  Good news for the car industry, but 9 out of 10 of those purchases are reliant on financing.  Last year, British households borrowed a record £31.6b to upgrade their car.

The boom has been fuelled by personal contract purchase plans (PCP’s). PCP finance has risen five fold in five years.  Car makers have also piled in, with most manufacturers now having their own lending arms.  PCP’s have proved popular with customers, because they provide the “apparent” freedom to regularly swap old for new.

However, there are rumblings of claims management companies intimating volume claims (like the PPI flood) alleging:

  1. Mis-selling.
  2. Customers being sold PCP without the terms being explained properly.
  3. That poorer borrowers may be paying too much for credit, warranties etc.

Consumers may be taking on big loans assuming they can just sell the car back if they cannot afford payments, but cars are depreciating assets and the glut of new ones has caused some second hand values to slump. As such, a customer in default could lose his car, yet still find himself liable for the shortfall and no means to repay.

The concern must be that the total household debt in Britain is now passed the peak it reached before the financial crisis in 2008. The pressures on household finances are mounting.  The supremacy of subprime car loans may not bring the financial system down (like the subprime mortgages of 2008 did), but they could be seen as an early warning of a market in trouble.

For further information please contact Ritchie Irvine »

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FCA & Consumer Credit Regime DWF help you navigate through the changes.