Both UK unsecured credit and car loans surge

After looking at US auto-loans yesterday attention shifts today to the consequences of the easy monetary policy of the Bank of England. This was where Bank of England Governor Mark Carney regularly gave Forward Guidance about interest-rate rises and then ended up cutting them to 0.25% in Bank Rate terms. We also got an extra £60 billion of UK Gilt (government bond) QE and £10 billion of corporate bond QE of which the former is complete but the latter continues. As ever a subsidy for the banking sector or “The Precious” was tucked away in it and now amounts to some £47.25 billion of cheap funding called the Term Funding Scheme. All this was based on the Bank of England’s grim economic forecasts post the EU Leave vote. How have they gone?


BoE’s McCafferty says “We did get it wrong last August” on the forecasts for downturn made after Brexit vote ( @KatieAllenGdn )

In other words they got it wrong again but will he respond to rising inflation with an interest-rate rise?

“I don’t know if I will vote for a rate hike… hahahaha. It will depend on how I feel at the next meeting” ( @SigmaSquawk )

In spite of admitting to being wrong he appears unwilling to put right his mistake and as he was one of those considered to be most likely to be willing to do so the UK Pound £ fell below US $1.25.

Unsecured Lending

If we look for a consequence of easy monetary policy we would expect to find it here and regular readers will be aware that I have been warning about this since late summer last year. I warned about unsecured credit growth back on the 29th of September in particular.

The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

How is that going? From this morning’s update.

The net flow of consumer credit was £1.4 billion in February. The twelve-month growth rate remained at 10.5%

So as you can see the UK consumer continues to borrow at what frankly is an alarming rate if you look at the growth in the economy or even worse real wages. Each month we get a hint of slowing ( this month in personal loans) but there were hints of that in January which have just been revised upwards!

Car Loans

Some of the increases above are from the car loan sector so let me hand you over to the Bank Underground blog from last August.

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 was discussed in yesterday’s comments section and the blog puts it like this.

First, a growing proportion of finance is now provided by the car manufacturers themselves, often through their own finance houses. Intelligence gathered by the Banks’ Agents suggests that these so-called “captive” finance providers have a market share of about 70% of all private new car finance. Second, households increasingly rent their vehicles using Personal Contract Purchase (PCP) plans.

This is another version of the economic world using the rental model which in truth is a sort of back to the future change and it has happened on a grand scale.

Industry contacts of the Bank’s Agents estimate that around two-thirds of private new car buyers now rent their vehicles using PCPs. Under PCP, the car buyer does not initially take ownership of the vehicle, but instead rents it for an average length of typically three or four years.

There are various changes here and let us start with the monetary and economic one.

This change in buyer behaviour has undoubtedly contributed to the sharp rise in new car registrations and the level of consumer debt in the economy in recent years.

This has fed into the economy and boosted economic output and GDP as more cars are bought.

The popularity of PCPs has thus been associated with a shortening of the replacement cycle for private buyers, thereby boosting the aggregate level of consumer demand for new cars.

So far, so good, although where do the old cars go and what happens to them? Is there some sort of graveyard or perhaps lower prices for older cars? We also get a confirmation of my view that the economic world is increasingly rented these days.

A consumer who might never own the car is likely to view it in the same way they view a mobile phone contract, i.e. just another monthly Direct Debit.

The conclusion is that sooner or later there will be trouble.

Those structural changes have: (a) concentrated financial risk in an industry that is especially sensitive to the economic cycle (in contrast to previous cycles when risk had been shared to a greater degree with the household sector); (b) contributed to increased household borrowing, reflected in the very rapid growth of car finance in recent years and a trend towards premium models; and hence (c) made the car industry more vulnerable to negative shocks, including hikes in interest rates, exogenous falls in market prices of used cars, lengthening of the replacement cycle and changes in consumer tastes.


Number Crunching

The UK Finance and Leasing Association or FLA helps out.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer car finance market grew 12% by value and 8% by volume in 2016……The percentage of private new car sales financed by FLA members through the POS reached 86.6% in 2016, up from 81.4% in 2015.

Meaning the Bank of England was behind the times again. In terms of amounts there is this.

£88 billion of this was in the form of consumer credit, over a third of total new consumer credit written in the UK in 2016. £41 billion of it supported the purchase of new and used cars,

Here are the most up to date numbers we have.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 9% by value and 3% by volume in January, compared with the same month in 2016.

On the way we see another hint of inflation in the UK. Oh and should you look at their website I too am unsure why they have a Base Rate at 0.5%.

Business Lending

Back in the summer of 2013 when the Funding for Lending Scheme began we were promised that it was for business lending. In reality we have seen the mortgage market return to positive net lending and for unsecured credit to mimic a hot air balloon. So what about business lending?

Loans to non-financial businesses decreased by £1.8 billion in February, compared to the recent average increase of £0.9 billion . Loans to small and medium-sized enterprises (SMEs) increased by £0.6 billion in February.

If we look for some perspective the annual growth rate is 1.7% overall and 1.2% for SMEs which provides quite a contrast to the household unsecured credit data does it not?


As you can see the easy monetary policy of the Bank of England has boosted unsecured credit and a lot of it comes from the car loan sector it would appear. So earlier this week it warned about the consequences of its own actions.

UK household indebtedness remains high by historical standards and has begun to rise relative to incomes.  Consumer credit has been growing particularly rapidly.

Is that the same unsecured credit that it has told us is not growing rapidly or a different one? As to the motor industry there are clear worries although so far it assures us there is no problem. From MotorTrader on the 20th of this month.

The used car market is showing “no signs” of cooling down despite the high volume of PCP cars coming back into dealers as part exchanges.

As a last thought has the borrowing been shifted from businesses to the household in the car sector? That fits with the novel below.


A great novel and are we on the way to its suspensor suitcases?


24 thoughts on “Both UK unsecured credit and car loans surge

  1. Hello Shaun,

    Why should businesses need more money ? I mean what are they going to sell in a market where the customer/ consumer has little or no spare cash ?

    Student debt, mortgages and can only get a car on credit? Food bills are increasing so has fuel costs ( seen the “greening” costs for ‘leccy ? )

    At every point the pound in the pocket is worth less – perhaps thats why its now made to look like threppunny bit ?


    PS : I better hedge my popcorn !

    • Hi Forbin

      Sooner or later someone will develop the suspensor idea

      “The Baron moved out and away from the globe of Arrakis. As he emerged from the shadows, his figure took on dimension – grossly and immensely fat. And with subtle bulges beneath folds of his dark robes to reveal that all this flesh was sustained partly by portable suspensors harnessed to his flesh. He might weigh two hundred standard kilos in actuality, but his feet would carry no more than fifty of them.”

      As to business borrowing there is the issue of to what end? But some must need it….

  2. Hi Shaun
    Thank you for todays topic, were on the
    road to nowhere.
    In the 60’s UK cars were old hat and
    foreign cars were considered by those in the trade
    to be “foreign c##p.” By the early seventies there
    were radical changes, Common market membership,
    new European and Japanese competition, a new
    concept called “discounting” and very high inflation
    With this heady mix it was easy to buy a
    new car and sell it at a profit after six months and
    used buyers changed more regularly because, in
    most cases, they could retain their purchase price
    after a years ownership. Because of this buoyant
    market, finance became more flexible. In the eighties
    discounting reached epic proportions and a new
    phrases “self registration” and “market share” became
    the new buzz words. In the nineties the manufacturers
    realised that very little profit could be attained, so they
    preached platitudes like “we have no need to discount
    excessively as the market has faith in our quality products.”
    In the noughties we all know what happened, eight years
    of moneymaking at a huge cost and here we are almost
    a decade down the line that can only have one inevitable


    • Hi JRH

      I do remember the days that investors would order Porsches etc. and sell them on for a profit. Of course the 70s blew out most UK car production due to the problems so we ended up starting again….

  3. Great article Shaun.

    As always with the boe, they close the barn door after the horse has bolted:

    The Bank of England has announced a review into whether the UK’s biggest banks have let their lending criteria become too loose. Britons are taking out unsecured loans at the fastest rate in more than 11 years and the Bank’s FPC is concerned that a surge in the indebtedness of households could fuel another debt bubble, noting that consumer credit was “growing particularly rapidly”. The Prudential Regulation Authority is launching a review into the credit quality standards that lenders impose for new consumer loans, with the BoE arguing that this needs to be “monitored closely”.

    Will the boe ever be held accountable?

    • Hi Anteos and thanks.

      A couple of weeks ago I saw the Yes Prime Minister episode on this sort of thing

      “Minister, there are 2 basic rules of government. Never look into anything you don’t have to. And never set up an enquiry unless you know in advance what its findings will be.”

  4. What I find amusing about the BOE is their use of self reflexivity. They create bubble conditions by their own policies and then express surprise that there are adverse consequences; it’s Econ 101 that when you lower the price of something then demand increases. Are they really that dumb?

    This is not a rhetorical question because I find it difficult to understand their reactions to these issues. The only alternative to me is that they realize that they are so far down the rabbit hole that there is no way back and that it’s all down to Mr Micawber; however, and as they say in polite circles “this is no way to run a railroad”.

    • Down the rabbit hole indeed –
      “In another moment down went Alice after it, never once considering how in the world she was to get out again.”

      Or something a little more thought-provoking from Lewis Carroll, the logician –
      “Never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.”

      Yes Bob, their reactions are strange. They don’t seem to be able to “connect the dots”, as Steve Jobs once remarked. Or if you prefer Alice’s version –

      “It’s a poor sort of memory that only works backwards.”

  5. Am I correct is thinking that a large proportion of the UK’s new car sales consist of German cars? If so, I’m guessing that these “vendor financing” arrangements are essentially just a relatively transparent sector-specific example of what appears to be the general German industrial-financial export strategy, which of course works only as long as your customers remain solvent.

    • It has always amused me that VW Financial Services are included in the EBA stress tests. I assume that the resale value of VW cars falling by 20% isn’t included in the stressors. Now what could possibly lead to the resale value of VW cars falling by 20% and does this maybe explain the reticence of European governments to treat VW in the same way as the US ?

  6. Great blog as always, Shaun.
    Very interesting about the PCP plans for motor vehicles. If the National Statistician, John Pullinger, is really serious about how the CPIH should measure consumption, not acquisitions, then just as the CPIH measures homeownership costs using a proxy based on dwelling rents it should measure the costs of owning motor vehicles using a proxy based on PCP plans. Of course, this would be quite incompatible with the way the CPI for motor vehicles is calculated now and must be calculated under HICP rules, so either the identity of the UK CPI with the UK HICP or of the CPIH excluding OOH with the CPI would have to go. I would never advocate such an index for any purpose but if Mr. Pullinger were true to his stated principles it would seem to me this is what he should be advocating.

    • Hi Andrew

      I too was reminded of the point made by John Wood at the recent Public Meeting into UK inflation measurement and CPIH. His arguement that cars should be treated as a stream of services/payments like rent for owner occupied houses gets vastly more support from reality than for what they have done. Oh what a mess!

    • Hi Peter

      The difference this time is that so much of the car finance is held by the car industry itself. I suppose that is another reason why we got “cash for clunkers” to support what is in effect apart of the shadow banking system.

  7. Is this the same Ian McCafferty that has now since joining the “Not Raising the Rate Committee”, voted 11 times in a row to raise rates, just to make it look like there are independent thinkers and don’t just follow Carney’s tune???

    I think TS Elliot’s poem Macavity’s cat is a little more than applicable to our slimy traitor at the Bank of England, the names are slightly different but the traits are the same,here are just a few lines that are in my opinion more than appropriate:

    “Macavity, Macavity, there’s no one like Macavity,
    There never was a Cat of such deceitfulness and suavity.
    He always has an alibi, and one or two to spare:
    At whatever time the deed took place – MACAVITY WASN’T THERE!
    And they say that all the Cats whose wicked deeds are widely known,
    (I might mention Mungojerrie, I might mention Griddlebone)
    Are nothing more than agents for the Cat who all the time
    Just controls their operations: the Napoleon of Crime.”

    • Hi Kevin

      I used to work at the same company as Ian many moons ago. Not long ago I met a friend from there for lunch who reminded me that his nickname was ” as” which was short for “as expected” which was the sort of name where someone who is 7 foot tall is called shorty…..

  8. Hi Shaun wages down ,inflation rising,borrowing increasing,housing prices rising.
    UK leaving the worlds biggest trading block.
    Never mind we can borrow to infinity and the good old BoE will just keep buying up the debt to suppress those rates and expand the currency/debt to infinity and beyond.
    In fact we can all retire tomorrow and they can just print all the money we need……from the money tree😎

  9. Given the BoE’s record, I would imagine that, upon hearing that another crash is on its way because of debt, this time on cars, will be
    1. Protect the banks
    2. Protect the banks
    3. Protect the banks
    4. Brag about saving the world
    5. We, that’s it

    • If they do it’ll be the last we see of a Tory government for a long time.

      This really is 100% of their making, well Dave, Gidiot and Carneys making with the rest of the Tory party doing and saying sweet FA.

      • It has been being made ever since Gordo chose CPI over RPI. Mortgage rates were 9%+ in 1997. They boomed for the next Govt and Gordo faked inflation so the “Independent” BOE could deal with a boom by cutting rates ….

        This Tory govt has been “Like a deer in the headlights”. Your problem is that both Tory and Labour are working for buy-to-let brigade and Tony Blair, I think has millions of quid worth of BTL property. Neither have any interest in generational justice- they’re both guilty of raising tuition fees.

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