[moonshine]

Interesting article about PCP loans and calls for mortgage style affordability stress tests
http://www.telegraph.co.uk/news/2017...ancial-crisis/

[GEP77]

It is certainly very interesting. Talking to a dealer some years ago they did get burnt by the 2008 crisis where people on PCPs just handed cars back without committing to a new one. The problem was that the glut of cars depressed the second hand market and they sold for somewhat less than the 'final' payment. Two things contributed here, the first was the lack of people rolling their agreement onto a new car which causes a cash flow dip for the dealers and the second was that the guaranteed future value (now final payment) was considerably higher in many cases than what the car could realistically sell for.

The major change that has happened is that the final payment value is far less generous than it once was and this has a major effect on the perceived risk to the lender.

Interestingly a squeeze on affordability checks for people rolling their finance onto a new car may have some interesting effects on the dynamics of the used car market in future years as those people may be forced into buying second hand rather than new or looking for a much lower priced car. It may also start to require more substantial deposits in order to reduce the risk to lenders.

It would be very interesting to see how many people on here would still get the car they've got if PCP deals were harder to get hold of.

[....,,,,..,,..]

They would likely just lease.

If you remember the 80's and 90's buying a new car was very pricey in the UK and we were paying over the odds, additionally you had to save.

It's quite a hard one, as yes there should be some tighter regulation, however make it too tight and you risk impacting car sales, risk pushing people back to older more polluting cars or out of a car altogether and possibly out of a job.

[CazuaLLUK]

Originally Posted by Brigand

They would likely just lease.

If you remember the 80's and 90's buying a new car was very pricey in the UK and we were paying over the odds, additionally you had to save.

It's quite a hard one, as yes there should be some tighter regulation, however make it too tight and you risk impacting car sales, risk pushing people back to older more polluting cars or out of a car altogether and possibly out of a job.

Totally agree, it's certainly a very interesting topic.

[moff]

The problem with PCP is the lack of equity towards the end of the deal. Too many dealers with BMW FS are driving the price as low as possible by encouraging drivers to go for 8k miles and putting a balloon on the deal that is too high.

In the US leasing is much more popular and there is the ability to 'sell' your lease to someone else mid-term making major changes in circumstance much easier to handle.

There is also the concern the increasing interest rates will majorly impact on a lot of households causing problems when paying PCP's.

The good thing with PCP's now is that the low rates are working for us. 2.9% APR for a new 3/4 series is decent combined with the good discounts.

Still don't understand why the M4 is at 5.9% and used BMW's are between 5.9-10.9% APR.

[Chr15b]

Originally Posted by moff

The problem with PCP is the lack of equity towards the end of the deal. Too many dealers with BMW FS are driving the price as low as possible by encouraging drivers to go for 8k miles and putting a balloon on the deal that is too high.

In the US leasing is much more popular and there is the ability to 'sell' your lease to someone else mid-term making major changes in circumstance much easier to handle.

There is also the concern the increasing interest rates will majorly impact on a lot of households causing problems when paying PCP's.

The good thing with PCP's now is that the low rates are working for us. 2.9% APR for a new 3/4 series is decent combined with the good discounts.

Still don't understand why the M4 is at 5.9% and used BMW's are between 5.9-10.9% APR.

I'd suspect that they don't have problems shifting the number of m4's they want to, a bit like ford excluding the mustang and focus rs from every deal they advertise.

The low Apr of new vs used is purely that the manufacturers have way more incentive to want to sell new registrations.

[moff]

Yeah I work in the automotive finance market so i get the quarterly deals.

I'm just gutted the backing for the M3 and M4 have been withdrawn.

[Soul_Glo]

Good find OP. Interesting read

[Soul_Glo]

Originally Posted by moff

The problem with PCP is the lack of equity towards the end of the deal. Too many dealers with BMW FS are driving the price as low as possible by encouraging drivers to go for 8k miles and putting a balloon on the deal that is too high.

In the US leasing is much more popular and there is the ability to 'sell' your lease to someone else mid-term making major changes in circumstance much easier to handle.

There is also the concern the increasing interest rates will majorly impact on a lot of households causing problems when paying PCP's.

The good thing with PCP's now is that the low rates are working for us. 2.9% APR for a new 3/4 series is decent combined with the good discounts.

Still don't understand why the M4 is at 5.9% and used BMW's are between 5.9-10.9% APR.

[Goneinsixtyseconds]

Originally Posted by GEP77

It is certainly very interesting. Talking to a dealer some years ago they did get burnt by the 2008 crisis where people on PCPs just handed cars back without committing to a new one. The problem was that the glut of cars depressed the second hand market and they sold for somewhat less than the 'final' payment. Two things contributed here, the first was the lack of people rolling their agreement onto a new car which causes a cash flow dip for the dealers and the second was that the guaranteed future value (now final payment) was considerably higher in many cases than what the car could realistically sell for.

The major change that has happened is that the final payment value is far less generous than it once was and this has a major effect on the perceived risk to the lender.

Interestingly a squeeze on affordability checks for people rolling their finance onto a new car may have some interesting effects on the dynamics of the used car market in future years as those people may be forced into buying second hand rather than new or looking for a much lower priced car. It may also start to require more substantial deposits in order to reduce the risk to lenders.

It would be very interesting to see how many people on here would still get the car they've got if PCP deals were harder to get hold of.

Not sure how the dealers get burnt by this. The dealers don't get the car back or get stung by it, my understanding is that it goes back to BMW Finance, who the deal is actually with. They take the hit.

That is why a dealer is happy to encourage you to VT a car with £5k negative equity and buy a new car. They get the new sale and BMW Finance take the hit on the one you send back, with no link to the dealer.

BMW will factor all this into new sale prices and will know historically how many cars usually come back with negative equity each year. Only the odd occurrence, as in 2008, can burn them as they wouldn't have predicted it.

[Wills2]

This is what happens when the vast majority of people haven't had a real terms wage increase for the last 10 years, the wage growth stats in the UK are bloody awful and the real issue and have actually seen a decline in real terms.

They can't have it all ways, business wants growth but won't pay it's staff enough to create that growth, they want their customers to be flush but their staff poor.

The government wants growth so keeps interest rates low which leads to cheap money, the wealthy use that to buy assets the poor and middle income earners use it to make themselves feel better about life (cars/holidays/watches/branded clothes etc...)

The wealth gap grows and the debts grow, so the government gets worried and slams the brakes on, growth falls, people lose jobs, debts go un paid....

[GEP77]

Originally Posted by Alex440

Not sure how the dealers get burnt by this. The dealers don't get the car back or get stung by it, my understanding is that it goes back to BMW Finance, who the deal is actually with. They take the hit.

That is why a dealer is happy to encourage you to VT a car with £5k negative equity and buy a new car. They get the new sale and BMW Finance take the hit on the one you send back, with no link to the dealer.

BMW will factor all this into new sale prices and will know historically how many cars usually come back with negative equity each year. Only the odd occurrence, as in 2008, can burn them as they wouldn't have predicted it.

The reason they got 'burnt' by the events of 2008 is that there was a glut of cars being handed back, either by VT or by reaching the end of PCP deals with no new sale emerging.

The reason PCP works so nicely for dealers normally is that it encourages repeat business, which is easy money for a car dealer.

[BigBanana]

Originally Posted by Wills2

This is what happens when the vast majority of people haven't had a real terms wage increase for the last 10 years, the wage growth stats in the UK are bloody awful and the real issue and have actually seen a decline in real terms.

They can't have it all ways, business wants growth but won't pay it's staff enough to create that growth, they want their customers to be flush but their staff poor.

This really pisses me off!

Cost of living annual increase of my wages (and most colleagues) has been 2 or 2.5% each year for the last 10 years.

Company rates have increased by 4 or 5% each year!
In real terms, I'm 25% behind relative to my starting salary.

[Goneinsixtyseconds]

Originally Posted by GEP77

The reason they got 'burnt' by the events of 2008 is that there was a glut of cars being handed back, either by VT or by reaching the end of PCP deals with no new sale emerging.

The reason PCP works so nicely for dealers normally is that it encourages repeat business, which is easy money for a car dealer.

The pcp part of that is irrelevant as the dealer doesn't take the hit, BMW finance does.

The downturn in new sales due to the recession obviously affected them, but not sure what the pcp element had to do with that.

If anything it helped people who were no longer cash rich still buy cars, so mitigated the affect of the recession, not worsened it.

[rich100]

Very interesting article thanks for posting.

If pcp lending becomes regulated in the same way that mortgage selling was several years ago then I think the motor industry will have a huge amount of work to do in terms of training its sales force to the standard that will be required.

When I took my pcp out I don't recall any questions being asked about my capability to repay it. Similarly when I paid the balloon payment the dealer attempted as expected to get me to take out a new one. When I declined this they switched tack and were quite persistent in getting me to refinance the balance with them despite me explaining that I'd already made provision for this and has the means to clear it.

They said at the time "it would be better for me to refinance the balance than use my savings to clear it" yet in making this statement they had zero idea of my circumstances nor had they asked me any questions to be enable them to substantiate this. Perhaps if I'd agreed these questions would have followed but I doubt it.

[Dave911]

Originally Posted by rich100

When I took my pcp out I don't recall any questions being asked about my capability to repay it.

Same here. Wasnt asked a thing about income or how many hours I worked etc. Finance was apporved instantly even though I have never had a loan anywhere near as much as the car. Easiest finance application ive ever used.

[rich100]

Originally Posted by Dave911

Same here. Wasnt asked a thing about income or how many hours I worked etc. Finance was apporved instantly even though I have never had a loan anywhere near as much as the car. Easiest finance application ive ever used.

Nice an easy I'll it give it that. I would be interested to see the motor industry's bad debt / default stats.

[HighlandPete]

Originally Posted by Alex440

If anything it helped people who were no longer cash rich still buy cars, so mitigated the affect of the recession, not worsened it.

I was one of those caught up in the financial crisis/recession, when car values plummeted. I was due to get into a new car in 2009. A new PCP made no sense at all.

There was no equity in the car, due to the drop in residuals, caused by the crisis, BMW (used car values) and the wider market being stung. A new deal was therefore a poor option, compared to 2006. I specced the same car, finance was coming in at £100 a month more than in 2006, RV was a lot lower than on the previous car.

I kept the car, decided to run in on longer. Partly as it was the cheaper option and we didn't really know how the crisis would pan out at that time. BMW/dealer lost a sale, I wasn't the only one doing the same.

[225]

Its not a dealer approving the finance though they send it off to bmw finance so if you say you can afford it what do they care bar losing a sale?
Regulated by the fsa in that respect is a couple of forms you sign at a dealership...

[ukbeemerboy]

Originally Posted by 225

Its not a dealer approving the finance though they send it off to bmw finance so if you say you can afford it what do they care bar losing a sale?
Regulated by the fsa in that respect is a couple of forms you sign at a dealership...

Exactly this, you sign the agreement that basically agrees you can repay the money lent. From the finance companies point of view, they have the asset of the car should you defer on the payments.

[rich100]

Originally Posted by 225

Its not a dealer approving the finance though they send it off to bmw finance so if you say you can afford it what do they care bar losing a sale?
Regulated by the fsa in that respect is a couple of forms you sign at a dealership...

If the FCA decide to regulate this area the process will inevitably have to become more rigorous than it currently is at the moment.

[rich100]

Originally Posted by ukbeemerboy

Exactly this, you sign the agreement that basically agrees you can repay the money lent. From the finance companies point of view, they have the asset of the car should you defer on the payments.

True and a valid point. This asset however isn't the best form of security I've ever seen due to the fact it depreciates like a stone in the majority of cases.

The fact that a pcp can be taken with a 10% deposit doesn't provide much of a cushion if the borrower defaults.

This clearly doesn't appear to be a problem at the moment though and I would imagine any bad debts being seen must currently be within tolerable levels.