Car Finance Industry continues to soar as Bank of England Fear a Potential Crash

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In a Financial Stability Report issued by the Bank of England, dealership finance had been highlighted as an avenue that had received a dramatic increase in the past few years.

Indeed, the report highlighted that dealership finance had increased by 20% a year since 2012 and that the total amount of stock of dealer finance had increased by a huge £30bn over the same period.

However, BoE did also note that car finance was a lot safer than most other forms of consumer finance due to its security measures.

The report stated that:

“Arrears rates on dealership car finance tend to be lower than for other forms of consumer credit. Unlike most other consumer credit, this lending is secured, with the vehicle acting as collateral.

“But the value of this collateral declines over time, and is dependent on conditions in the used car market. Exposures to PCP lending may be particularly sensitive to market conditions.

“If the borrower chooses to return the car at the end of the loan, and the value of the used car is less than the outstanding loan amount, the lender will make a loss.

“Lenders can seek to mitigate these risks by making conservative assumptions about the future value of used cars, though these assumptions are inherently uncertain.”

Adrian Dally, head of Motor Finance at the Finance & Leasing Association, said: “We welcome the Bank’s recognition that arrears rates on dealership car finance tend to be lower than for other forms of consumer credit because it is secured against the vehicle.

This statement follows the Bank of England’s calculations of PCP cars. Which suggested that if every PCP car was handed back to the dealer with its price being 30% lower than it was at the beginning of the finance contract, the impact on the banks capital ratio would be minimal.

“We note that the Bank’s hypothetical modelling of a fall in used car values going well beyond anything seen historically – even during the financial crisis – nonetheless shows a relatively modest impact on capital ratios.

“In fact, lenders providing car finance have long experience of modelling car prices during all sorts of financial conditions, and the risks are well-understood and well-managed.”