UK credit and car loan problems are building

As we look at the UK credit situation there are building pressures almost everywhere we look. This is hardly a surprise if we step back and review the years and years of easy monetary policy involving cutting the Bank Rate to a mere 0.25% and some £445 billion of QE ( Quantitative Easing) as well as other policies. If we stay with QE then the UK is second on the list in terms of how much of its bond ( Gilt) market has been bought by its central bank at 37% according to Business Insider. I doubt Governor Carney will be emphasising this too much when he presents the Financial Stability Report today.

Central bankers are capable of the most extraordinary blindness when it comes to themselves however as I noted when I received this in my email inbox.

Why are house prices in the UK so high? Can prices and mortgage debt continue to rise? How is government policy affecting outcomes? David Miles will explore these issues and consider how the property landscape in the UK might play out over the longer term.

This is the same David Miles who in his time at the Bank of England did as much as he could to drive house prices higher with his votes for Bank Rate cuts, more QE and the bank subsidy called the Term Funding Scheme. He even voted for more QE in the summer of 2013 as the UK economy picked up! Of course in his last month in the autumn of 2015 he claimed he was on the edge of voting for a Bank Rate rise but this only fooled the most credulous. The reality is that he was a major driver in creating this sort of situation. From April.

Yorkshire Building Society is launching a mortgage with the lowest interest rate ever available in the UK at 0.89%.

The new 0.89% product is a two-year variable mortgage with a discount of 3.85% from the Society’s Standard Variable Rate (SVR), which is currently 4.74%, and is available for anyone borrowing up to 65% of the value of their property.

Car Loans

This is another problem area that we have looked at several times due to two main factors. Firstly we have seen quite a rate of growth and secondly the market has changed massively. These days nearly all new cars are bought on credit as this from the Finance and Leasing Association makes clear.

In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.

The deals look initially very attractive.

There are often 0% deals available, so it’s worth shopping around.

However there is a “rub” as Shakespeare would put it and we see the danger here as the Financial Times takes up the story..

Most borrowing is in the form of Personal Contract Purchases. Customers pay a deposit and monthly payments for a fixed period. At the end of the contract, they can buy the car from the manufacturer for a price guaranteed at the start.

The in-house banks of car companies, which provide most of the finance for PCPs, generally set this guaranteed price at about 85 per cent of what they think the used car will be worth.

We know that in the United States used car values have dropped sharply so let us look at the UK as the FT explains.

“However, the detail is the key,” said Rupert Pontin, director of valuations at Glass’s. Newer used-cars are losing more of their value and more quickly. A used car that is less than two-and-a-half years old is worth 57.6 per cent of its original value, down from 61.1 per cent in 2014.

“This is likely to continue to be the case for the rest of 2017 and into 2018 as well,” he said, as more cars come off the three-year credit deals they were bought with and that have been wildly popular with UK consumers.

So they are “Fallin'” as Alicia Keys would say. This poses quite a problem for a system which depends on the resale value of the cars. Initially this will probably hit the manufacturers who offer these schemes as those leasing will presumably hand more of the cars back. For deals going forwards though the resale value will be adjusted lower and be factored into the deal making the buyer/consumer get worse terms.

This has changed the car market

I have written in the past about a friend who bought a car and took a contract deal because believe it or not it was £500 cheaper than buying it outright. More is added on this front in a reply to the FT from leftie.

There’s no truth in the description ‘interest free’.  The cost of the loan is built into the ticket price.   We know that because the seller may not offer a discount on the sale price for fear of the ‘interest free’ bluff being found out.  It’s institutionalised dishonesty that traps the unwary and leads to excessive debts.

Whilst some do game the system most are unwary pawns.

I found it was cheaper to buy my small new Ford on PCP credit than pay cash, and the dealer admitted he would get more commission from the former.

Don’t worry, he told me: wait a couple of days for the systems to update then ring Ford and pay off the loan. I did, and accrued interest was negligible. Few people do this – it’s so tempting to hang on to your cash. ( johnwrigglesworth )

So the Merry Go Round rumbles on with the can as ever being kicked about 3/4 years each time. What could go wrong? From the FT.

Many car loans are securitised — packaged together and sold on to investors as bonds — as mortgages were in the run-up to the financial crisis. This has led some to worry that a slowdown in car sales could cause financial instability.

I have noticed something rather troubling this morning and let me make it clear that this is from the US and not the UK but of course such things tend to hop the Atlantic like it is a puddle and not an ocean.


This faces ch-ch-changes as explained by the Agents of the Bank of England last week.

Contacts reported a range of potential headwinds, including
the slowdown in real pay growth, upward pressure on new car prices arising from sterling’s depreciation and, for high-volume manufacturers, weaker second-hand car residual values, which had raised the costs of depreciation and so car finance.


If we start with the UK car market it has seen an extraordinary amount of stimulus. First came its own form of QE as redress payments from the Payments Protection Insurance scandal came into play and next came the easing of the Bank of England. No wonder sales have risen and not all of the drive came from the UK as some came from policies elsewhere as the FT explains.

Thrifty German savers in search of better interest rates have helped fund the debt-fuelled car-buying boom in the UK…..The biggest deposit taker is Volkswagen which had €28bn of consumer deposits in 2015, followed by BMW with €15.9bn. RCI Banque, the bank of Renault, had €13.6bn of deposits.

Meanwhile for Bank of England Governor Mark Carney it is clear that a week is apparently a long time in central banking. Last week we saw boasting.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows,

This week the Financial Stability Report tells a very different story.

Consumer credit has increased rapidly

Something to cheer like the Governor did? Er no.

Bringing forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress

So perhaps not as we see a rise in the capital required by UK banks.

Increasing the UK countercyclical capital buffer rate to 0.5%, from 0%. Absent a material change in the
outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC
expects to increase the rate to 1% at its November meeting.

That will be two steps of £5.7 billion if the initial estimates are accurate as we note they have finally spotted something we started looking at last summer.

Consumer credit grew by 10.3% in the twelve months to
April 2017


Me in City AM




29 thoughts on “UK credit and car loan problems are building

  1. I too bought a vw on credit and received a large discount and paid the whole thing off after a couple of weeks. There is nothing they can do to stop this as they legally have to offer an early payment option.
    Do you think that they should do stress tests on car manufacturers?

    • When you look at new car sales as a proportion of GDP,the prospects are quite terrifying,underpinned as it is by PPI payouts.

  2. Shaun, could you give an idea of the scale of the potential problem of car loans in the US compared with the size of the sub-prime mortgage disaster in the US? That is, does it threaten the apparently better-financed banks in the same way?

  3. It certainly doesn’t bode well & the US with us as usual following in it’s wake, appear to have a bit of a froth of bubbles. Cars, property, & student loans being three I can think of off the top of my head. The methods used to induce people to take on credit strike me as reeking of desperation, which probably illustrates the fact that very juicy bait needs to be offered to the many who are already up to their necks in their own version of kicking the can.
    I have also seen reports of investors taking on ever riskier forms of investment in order to gain a little bit of extra yield, but as growth is it seems dependent on ever growing credit expansion, I suppose that none of the above is surprising.
    I had this link sent to me yesterday with the added information that in the US it has taken a 9% growth in credit to increase GDP by 2%. As I am not that savvy on these things, those figures might need examination, but if they are valid – these charts from the US do not appear to paint a happy picture :

    • It doesn’t bode well. In fact, the quotation from Carney above to the effect that he’s pleased that the stimulus is working i.e. We are all borrowing more is rather chilling to me

    • The worst by a country mile economically is student debt.

      £50,000 for a degree in classical civilisation will seem very overpriced to the twenty year olds of the 2030’s.

      The drag it will provide as people enter their peak spending years 20-54 will cause a depression if nothing else does.

      Obviously,someone forgot to point out that producing 300,000 UK domicled graduates doesn’t guarantee them all a graduate job

      • The Terry Wogan quip (“What do you say to a graduate with a job?) must be close to 30 years old. Post-Graduate employment has always been tricky for some; but now the debt just makes it unbearable.

        In case the reader has forgotten, the answer was –
        “Big Mac and fries, please”

    • On the American credit charts they belie the title. The charts demonstrate credit GROWTH reducing, which is an entirely different issue to a collapse, whereby the amount of credit offered this year is less than last year. If the reduction continues then depending on your view this will be a good OR bad thing:

      If you believe the level of credit is too high and is ultimately threatening future GDP growth then it’s “good”.

      If you believe that credit is required to provide ongoing GDP growth then it’s “bad”.

      The statement re credit growth and GDP is meaningless absent the the actual values for both items and the time periods to which they relate.

      • One other thing about the US – it will show a slowdown over the summer but will then re-accelerate at the end of the year.

        The charts you have do not show recent credit growth which has levelled off and I expect to increase again in the fall as other indicators are already pointing that way.

        Generally, European growth will start slowing in the fall whilst global growth has already peaked and is expected by me to slow through the summer, not a crash, merely a slowing.

      • Thanks for putting me straight there, lack of savvy fully exposed. However savvy aside, the rest in terms of debt & risk taking, I strongly believe is unsustainable simply from a common sense perspective.

  4. Shaun,
    I wonder how the people who lost money in Cyprus with bank closures feel.
    If Italy can break the rules, why not Cyprus?
    Or are rules only for little people (counties)?

    • Hi Nick

      I think that there must be dissent in Cyprus especially those in Laiki Bank who saw their deposits switched to shares in a bank which quickly folded. There are two clear differences which firstly is the Italian attitude to such rules and secondly the scale of the problem. Even though as a nation Italy had a debt to GDP ratio of 132.6% at the end of last year it can afford to borrow the money to bail out these banks partly of course because the ECB is buying its debt.

      As I wrote yesterday this poses a lot of questions for a European Banking Union…

  5. Great blog as always, Shaun.
    In the press conference today, a Reuters journo asked Carney about Kristin Forbes’ complaint that monetary policy was getting short-changed by the Bank of England because the internal members of the MPC were spending too much time on financial stability issues, without mentioning her by name. She specifically mentioned that the Governor and the Deputy Governors were on the Financial Stability Committee and the Prudential Regulation Committee and that really cut into the time they could devote to MPC issues. Sam Woods, the DG for Prudential Regulation, is not on the MPC, but both Cunliffe and Ben Broadbent are, in addition to being on the FSC and the PRC. Carney’s reply was very weak, saying that it took the same amount of time to consider an interest rate drop as an interest rate hike. He is on thin ice saying that the new regime is even-handed in this regard, since it has only reduced the bank rate to a record low and never increased it. Forbes other complaint, that FPC decisions seem to be used to take the pressure off the MPC to hike the bank rate, also was confirmed today with the FPC decision to raise the countercyclical capital buffer rate now to 0.50%, with a hike to 1.00% pencilled in for November. It does give the appearance of being a move to stave off a bank rate increase to 2018. Carney was careful to keep Forbes’ name out of his reply, although he must have recognized where the question came from.

    • Hi Andrew and thank you

      I agree that the reply was weak as after all Mark Carney spent two years or so offering “Forward Guidance” that he would raise interest-rates before cutting them in a panic post the EU Leave vote. As to time spent I always thought that the FPC would be an arduous and frankly rather dull job. They seem to have struggled to get anyone of any quality to sit on it.

      The ones with “time” issues ( on both FPC and MPC ) would be Jon Cunliffe whose career has been associated with every British economic disaster over the past 20 years and Ben Broadbent who acts like an absent minded professor. So i would suggest that there are quality issues as well. Oh and the unreliable boyfriend…..

      • Shaun you need to get a press pass for his Q&A sessions, would certainly spice it up with someone asking some more pertinent questions.

    • Hi chrislongs

      Quite possible as wasn’t a diesel scrappage scheme mooted before the general election? As I have an old diesel ( which was sold as high-tech and clean at the time) it could even cover me.

  6. The debt bubble continues to expand on all fronts,houses,cars,student loans.
    Pension freedoms were introduced for the sole purpose of keeping the ponzi scheme economy going for a few more years.
    What is certain is there can only be one outcome and it will be disastrous.
    Kamal Ahmed was doing his usual party line piece..”its an amber warning”
    The brainwashing of young people is complete another BBC Breakfast item about ATMs …there was a guy who runs a cashless coffee shop and others who say you don’t need cash just go contactless or use your phone…..these people have no sense of the value of real money.
    I despair.

  7. Thatll be the same David Miles who oversaw the boom in interest only buy to let mortgages which resulted in banks such as B&B NR needing to be bailed out or going bust.

    The same David Miles who is now saying amateur landlord should still be allowed to offset mortgage interest payments allowing them to leverage even more than they’ve done already … a tax break owner occupiers lost many years ago.

    He is claiming if his bubble disciples can no longer get such tax breaks the plebs he priced out will have to pay 30% more in rent –

    Hope he’s been knighted for his work, what a great specimen of a human this one turned out to be, who needs an economy when we have houses to sell to a diminishing part of society at ever increasing prices.

  8. Like Bernanke’s arrogance and hubris before the sub prime crisis in the US, Carney is eventually going to have to eat his shorts(if he is still around by then), he thinks because nothing negative has happened as a consequence of his excessive stimulus, nothing can now go wrong, the car credit mess and the student loan disaster will I believe eventually be bailed out by taxpayers one way or another(another cash for clunkers/green initiative, tax write off for students in early years of employment or some other iterations thereof), the housing bubble? Well that’s another matter, the government will sell the future of the entire country to protect that one.

    • Hi Kevin

      There seems to be a virus that makes central bankers say silly things and it affected Janet Yellen this evening. From Reuters.

      “U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.”

      What could go wrong?

  9. Not too far away is a related issue, the adoption of electric vehicles. There will be a point at which the choice, cost, and range will start a wide-scale uptake, with commuters leading. Petrol/diesel cars will quickly be stigmatised, and there will be no resale value. Thinking this is too far off to bother about is where the industry is today, including finance arms. The point is that the trigger will be when it is realised that zero resale value is likely, and then we’ll see a huge drop off in conventional car sales, and a realisation of the problem in loan models. Stanfords recent RethinkX report on ev’s is a more alarming prospect, but ev’s are about to hit regardless.

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