According to the Bank of England consumer credit has been growing much faster than household incomes in recent years, with dealership car finance seeing the fastest growth. In 2016 there has been approximately £32 billion spent on car loans in the UK, that is the equivalent of the total annual National Defence budget. For me, these figures set off alarm bells and raised some key questions:
- How has the industry changed to enable these sky rocketing figures?
- Have banks not learned their lesson from the financial crash of 2008?
- Who are the real winners? and who can consumers trust?
I bought my first car back in 2004, car financing seemed simple then. You paid a deposit and then made monthly payments, with interest, until the loan was paid off. Over the last decade a new form of car loan has jumped onto the market, "personal contract purchases" (PCP). It is suggested that the majority of new cars bought in the UK is bought through PCP.
So how does this work?
There is no deposit to pay with much lower monthly payments until the end of a fixed term. Once that has ended you either make a large "balloon" payment or return the car. The dealer either gets all the cash and interest generated by the loan or, in the case of someone who can't afford the balloon payment, the dealer can sell the car again.
Why is this so risky?
So if the car is returned the dealer is left with a car that is hard to sell in a recession with prices continuously dropping. That leaves dealerships and the banks funding them exposed to a highly volatile market. The Bank of England estimates "major UK banks’ total exposures to UK car finance to be around £20 billion".
The important question we need to ask ourselves as consumers is the quality of the car loans themselves. Last month Dispatches exposed the truth behind what is really going on with some car dealers (not all) that has given the industry a really bad reputation and having the potential to crash the economy again only this time with car loans instead of mortgages. The Financial Conduct Authority (FCA) are concerned about the lack of transparency, conflict of interest and irresponsible lending. With the car salesman (or woman) selling you credit as well as the car does not always mean that they have the customers interest at heart.
The documentary revealed how an unidentified former salesman admitted that PCP was not the best deal for the customer, regardless of their job or annual salary. In fact he pushed that deal more because it had the most attractive commission attached to it. The undercover investigation showed how certain salesmen were telling potential customers not to worry about the condition of the car when it is returned, but the fact is that the customer will be charged a high price for any damage that the finance company can provide evidence with. Therefore the car dealers are misleading the customer with incorrect information not allowing them to make an informed decision before purchase.
Roman Danaev, the founder of Finance365 talks to me about why he finds this industry so upsetting and why he feels responsible lending is vital to ensure both the consumer and lender is safe.
“I started Finance365 because I myself was mis-sold a PCP finance deal by a main dealer which resulted in an unaffordable balloon payment. This made me think that most people struggle with repayments on some car finance deals due to no income and expenses calculation. My frustration with the industry was to do with irresponsible lending by the brokers and lenders who always pushed the limits of credibility on car values and finance APRs.” - Roman Danaev
I found Roman’s approach to car financing as refreshing and a much needed fairer approach. He understands building trust allows him to understand his clients needs, providing them the most beneficial lending package that suits their budget.
“Finance365 treats all customers fairly, my core goal is to help people get into the car that that they can afford and matches their lifestyle so that they don’t get themselves into more debt or deal that will not be repaid.” - Roman Danaev
If you are thinking about financing a new car I would definitely recommend considering all options, and remember that there are trusted car financing businesses such as Finance365 out there. It is just a matter of filtering the good guys from the crowd of sharks.