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You can find the current article at its original source at https://www.theguardian.com/money/2017/sep/19/car-finance-debt-dealers-consumer-credit
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| Version 3 | Version 4 |
|---|---|
| Car finance: the fast lane to debt? | Car finance: the fast lane to debt? |
| (about 1 month later) | |
| A visit to the car showrooms around north London gives a stark illustration of how British consumers have driven themselves almost £60bn into the red. | A visit to the car showrooms around north London gives a stark illustration of how British consumers have driven themselves almost £60bn into the red. |
| Seemingly cheap financing deals offer the opportunity to drive away a brand new car less than two weeks from signing on the dotted line. There can be little or no deposit, while monthly payments from as little as £100 can stretch the bill over a two- to four-year period. | Seemingly cheap financing deals offer the opportunity to drive away a brand new car less than two weeks from signing on the dotted line. There can be little or no deposit, while monthly payments from as little as £100 can stretch the bill over a two- to four-year period. |
| While credit cards and personal loans make up the bulk of a £200bn debt mountain accumulated by British consumers, car finance has seen the fastest expansion. The second most expensive purchase in the majority of people’s lives, after buying a home, is now as simple as taking out a new mobile phone contract. | While credit cards and personal loans make up the bulk of a £200bn debt mountain accumulated by British consumers, car finance has seen the fastest expansion. The second most expensive purchase in the majority of people’s lives, after buying a home, is now as simple as taking out a new mobile phone contract. |
| There is no suggestion the sales practices are illegal or that any rules have been broken, yet they illustrate a significant shift in the way cars are bought in the UK. Salespeople at three dealerships visited by the Guardian offered vehicles on the road with little or no deposit. One suggested a £1,000 downpayment to secure a 1.5l Mini Cooper, with a top speed of 127mph, which could be refunded when the car was collected from the showroom a few days later. Deposits can even be paid for by credit card, adding to the debt pile. | There is no suggestion the sales practices are illegal or that any rules have been broken, yet they illustrate a significant shift in the way cars are bought in the UK. Salespeople at three dealerships visited by the Guardian offered vehicles on the road with little or no deposit. One suggested a £1,000 downpayment to secure a 1.5l Mini Cooper, with a top speed of 127mph, which could be refunded when the car was collected from the showroom a few days later. Deposits can even be paid for by credit card, adding to the debt pile. |
| Two dealerships offered to contribute to the deposit. A Volkswagen showroom offered £1,000 off the £3,500 suggested deposit on a 1.4l Golf TSI. When asked why, the salesman said it was because the finance package was put together by the German manufacturer’s own credit lending arm to encourage sales. | Two dealerships offered to contribute to the deposit. A Volkswagen showroom offered £1,000 off the £3,500 suggested deposit on a 1.4l Golf TSI. When asked why, the salesman said it was because the finance package was put together by the German manufacturer’s own credit lending arm to encourage sales. |
| “Because it’s Volkswagen, Volkswagen financial services. So, on the odd occasion, they’ll contribute some money towards it so you don’t need to do any more,” he said. Pointing to the printed quote for the car. “Where it says deposit, I’ve shown it as £3,500. Just remember, it’s £2,500 for you.” | “Because it’s Volkswagen, Volkswagen financial services. So, on the odd occasion, they’ll contribute some money towards it so you don’t need to do any more,” he said. Pointing to the printed quote for the car. “Where it says deposit, I’ve shown it as £3,500. Just remember, it’s £2,500 for you.” |
| Britons previously paid cash or took out a loan from a high street bank. Now, they’re increasingly turning to finance packages, with a package known as the personal contract purchase (PCP) among the most popular. | Britons previously paid cash or took out a loan from a high street bank. Now, they’re increasingly turning to finance packages, with a package known as the personal contract purchase (PCP) among the most popular. |
| One salesman said: “Most people come in here and they’re just thinking ‘Ah, they’re looking’. And then they tend to walk out with a PCP agreement.” | One salesman said: “Most people come in here and they’re just thinking ‘Ah, they’re looking’. And then they tend to walk out with a PCP agreement.” |
| PCP deals offer cars for small monthly payments. Some 86% of all new car registrations use some form of credit, with PCP arrangements featuring prominently. At the end of the PCP contract, customers have the option to make a pre-agreed “balloon payment” or hand the keys back to the dealer and walk away. | PCP deals offer cars for small monthly payments. Some 86% of all new car registrations use some form of credit, with PCP arrangements featuring prominently. At the end of the PCP contract, customers have the option to make a pre-agreed “balloon payment” or hand the keys back to the dealer and walk away. |
| The size of this payment is set when the loan is issued, based on the amount paid through a deposit and on the estimated value of the vehicle in the used car market at the end of the loan period. | The size of this payment is set when the loan is issued, based on the amount paid through a deposit and on the estimated value of the vehicle in the used car market at the end of the loan period. |
| The Guardian was offered a Mercedes A Class hatchback for about £300 per month for 48 months with no deposit. The retailer and manufacturer would put in about £600 towards a deposit, at the “manager’s discretion”, while the balloon payment would have been for just less than £8,000. | The Guardian was offered a Mercedes A Class hatchback for about £300 per month for 48 months with no deposit. The retailer and manufacturer would put in about £600 towards a deposit, at the “manager’s discretion”, while the balloon payment would have been for just less than £8,000. |
| Some dealers suggested paying as small a deposit as possible to get the car for as little payment as possible, encouraging the Guardian to refinance at the end of the deal, rather than ever buying a car outright. More than 80% of PCP buyers roll over their contracts to a lease on a new car. | Some dealers suggested paying as small a deposit as possible to get the car for as little payment as possible, encouraging the Guardian to refinance at the end of the deal, rather than ever buying a car outright. More than 80% of PCP buyers roll over their contracts to a lease on a new car. |
| One dealer said: “If you put too much deposit in, the PCP doesn’t financially make sense at the end.” | One dealer said: “If you put too much deposit in, the PCP doesn’t financially make sense at the end.” |
| Another compared the system to changing mobile phones. He said: “You have the ability to change after three years. You know, like you do with your mobile phone.” | Another compared the system to changing mobile phones. He said: “You have the ability to change after three years. You know, like you do with your mobile phone.” |
| The changes could mean risks for buyers, as they adapt to a new and more complex system for purchasing vehicles. That has prompted an investigation from the Financial Conduct Authority, the City watchdog, including an inquiry to see if firms adequately assess whether buyers have the ability to repay their car loans before taking them out. | The changes could mean risks for buyers, as they adapt to a new and more complex system for purchasing vehicles. That has prompted an investigation from the Financial Conduct Authority, the City watchdog, including an inquiry to see if firms adequately assess whether buyers have the ability to repay their car loans before taking them out. |
| Although the Guardian did not complete a car purchase, very few questions were asked about affordability for the buyer – although several asked for the buyer’s “monthly budget” and were told it was between £150 and £300 per month. Some dealerships said they would need to make checks required under FCA regulations, while some warned of repossession in the event of failure to repay. | Although the Guardian did not complete a car purchase, very few questions were asked about affordability for the buyer – although several asked for the buyer’s “monthly budget” and were told it was between £150 and £300 per month. Some dealerships said they would need to make checks required under FCA regulations, while some warned of repossession in the event of failure to repay. |
| Asked about failing to keep up with payments, one salesman said: “That’s not good, you’re not in a good situation then. The car could get repossessed.” | Asked about failing to keep up with payments, one salesman said: “That’s not good, you’re not in a good situation then. The car could get repossessed.” |
| About three-quarters of the growth in consumer credit since 2012 has come from car finance. | About three-quarters of the growth in consumer credit since 2012 has come from car finance. |
| The Bank of England estimates the annual growth rate of dealership finance has been around 20% since 2012. Banks have contributed about £24bn in loans, while other providers, such as manufacturers’ own finance arms, make up the bulk of the market at about £34bn. | The Bank of England estimates the annual growth rate of dealership finance has been around 20% since 2012. Banks have contributed about £24bn in loans, while other providers, such as manufacturers’ own finance arms, make up the bulk of the market at about £34bn. |
| Deals offered to the Guardian | Deals offered to the Guardian |
| Mercedes A Class 160 SportDeposit: £0Mercedes deposit contribution: £673.64Monthly payments: £279Duration of agreement: 36 monthsOptional purchase payment: £9,450Total amount payable: £23,676.64 | Mercedes A Class 160 SportDeposit: £0Mercedes deposit contribution: £673.64Monthly payments: £279Duration of agreement: 36 monthsOptional purchase payment: £9,450Total amount payable: £23,676.64 |
| (Car list price: from £20,715) | (Car list price: from £20,715) |
| Audi A3Deposit: £2,036.50Audi deposit contribution: £1,500Monthly payments: £277.13Duration of agreement: 36 monthsOptional purchase payment: £9,455.35Total amount payable: £22,704.80 | Audi A3Deposit: £2,036.50Audi deposit contribution: £1,500Monthly payments: £277.13Duration of agreement: 36 monthsOptional purchase payment: £9,455.35Total amount payable: £22,704.80 |
| (Car list price: from £20,635) | (Car list price: from £20,635) |
| VW Golf TSIDeposit: £2,500VW deposit contribution: £1,000Monthly payments: £250Duration of agreement: 48 monthsOptional purchase payment: £7,875Total amount payable: £23,216.78 | VW Golf TSIDeposit: £2,500VW deposit contribution: £1,000Monthly payments: £250Duration of agreement: 48 monthsOptional purchase payment: £7,875Total amount payable: £23,216.78 |
| (Car list price: from £17,765) | (Car list price: from £17,765) |
| Mini Cooper | Mini Cooper |
| Deposit: £2,894.57Mini deposit contribution: £1,400Monthly payments: £169Duration of agreement: 48 monthsOptional purchase payment: £6,030.08Total amount payable: £18,268.65 | Deposit: £2,894.57Mini deposit contribution: £1,400Monthly payments: £169Duration of agreement: 48 monthsOptional purchase payment: £6,030.08Total amount payable: £18,268.65 |
| (Car list price: from £16,200) | (Car list price: from £16,200) |
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