Tim Pike, Phil Eckersley and Alex Golledge
Since our first post, car finance has risen up the agenda of regulators, journalists and policymakers. Here we provide an update on recent developments. Sterling’s depreciation has had little impact on car finance costs: first because pass-through to new car prices has been muted, and second because finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments. Providers are increasingly retailing contracts where consumers have no option to purchase the car at the end. This avoids some risks associated with voluntary terminations, but it creates new risks around resale value. In sum, the industry continues to accumulate credit risk, predicated on the belief that used car values will remain robust.
Alex Golledge, Tim Pike & Phil Eckersley.
The car industry’s fortunes play an important part in the stability of the broader economy. The automotive industry (including manufacturers, their suppliers, dealers, servicing, leasing and refuelling) accounts for over 4% of GDP. Demand for new cars is particularly sensitive to the economic cycle, typically falling sharply in recessions but growing strongly in recoveries (Chart 1). So it was not surprising that the Government introduced a car scrappage scheme between April 2009 and March 2010 to stimulate private new car demand following the recession. This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses. This has a risk of exacerbating the cyclicality of new car sales shown in the chart. Moreover, manufacturers increasingly bear the risk of future falls in car prices, potentially making the industry even more vulnerable to macroeconomic shocks.