Will car loans be the canary for UK unsecured credit?

Yesterday the news hounds clustered around one piece of economic news as they caught up at least tangentially with something we have been looking at for some time. From the Society of Motor Manufacturers and Traders.

UK new car market falls for sixth consecutive month in September – down -9.3% to 426,170 units. First time the important September market has fallen in six years.

This will have had an impact in various areas as for example if you happened to be an unreliable boyfriend style central banker looking for a reason to cancel a proposed Bank Rate rise for the third time you might think you have struck gold. However we were expecting trouble because as I pointed out on the 22nd of August there had to be a reason why manufacturers were offering what they call incentives but we call price cuts?

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

That issue has been added to by the uncertainty over what is going to happen to older diesels of the sort I have.

Confusion surrounding air quality plans has inevitably led to a drop in consumer and business demand for diesel vehicles, which is undermining the roll out of the latest low emissions models and thwarting the ambitions of both industry and government to meet challenging CO2 targets.

Back in the day I was told my Astra was efficient and low emission but let us move on whilst noting that official credibility in this area is very low. Registrations had been falling for 6 months compared to the year before so that we now find we have stepped back in time to 2014.

Year-to-date, new car registrations have fallen -3.9%. But, overall, the market remains at a historically high levels with over 2 million vehicles hitting UK roads so far this year.

What does this mean?

This is more of a consumption issue for the UK economy than a production or manufacturing one. You see in the year to August some 78.4% of UK car production was for export so whilst there is a downwards impact it is more minor than might otherwise be assumed. Ironically a fall in UK demand affects producers abroad much more as this from the European body indicates.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

For example Germany exported 809,853 cars to the UK in 2015 according to its trade body. Actually it may not be the best of times to be a German car manufacturer. From Automotive News Europe.

FRANKFURT — New-car registrations in Germany fell 3.3 percent in September as continued uncertainty over the future of diesel-powered cars hit demand.

The issue is complex as much manufacturing these days is of parts rather than complete cars. For example the UK engine industry has had a good 2017 but it is more domestic based so it will need more months like August if it is to carry on in such a manner.

Engine production rises 11.9% in August with more than 150,000 made for export and home markets. Overseas demand drives growth in the month, up nearly 20% compared with last year.

So we advance on knowing that there will be an effect on consumption and a likely smaller one on manufacturing although the latter is more unpredictable. What we will see is a reduction in imports which will boost GDP in an almost faustian fashion as the other factors lower it.

Car loans

So far there is nothing to particularly worry a central banker as after all it is not as if manufacturing or consumption are as important as banking is to them. However there is a catch and maybe the car manufacturers have been brighter than you might otherwise think. From the 18th of August.

That is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable  to shocks.

Now if we return to the real world the concept of prudential regulation is of course very different as after all it was not that long ago that so many banks needed large bailouts. But have the car manufacturers been very cunning in making themselves look like “the precious” as in the banks?

So much of the car market has gone this way that you could question what registration actually means? It used to mean a car was bought but these days is vastly more likely to mean it has been leased.

The FLA is the leading trade association for the motor finance sector in the UK. 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.

Today we were updated on how this is going?

New figures released today by the Finance & Leasing Association (FLA) show that new business volumes in the point of sale (POS) consumer new car finance market fell by 8% in August, compared with the same month in 2016, while the value of new business was up by 2% over the same period.

So in nominal terms they are doing okay so far but the real numbers are down. The response has been the normal “extend and pretend” of the finance industry where trouble is on the horizon.

finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments.

So as the Bank of England Financial Policy Committee Minutes observed earlier this week if we look back there has been quite a party.

Growth in UK consumer credit had slowed a little in recent months but remained rapid at 9.8% in the year to July 2017. This reflected strong growth of dealership car finance, credit card debt and other borrowing, such as personal loans. Growth of consumer credit remained well above the rate of growth in household disposable income.

So that is now slowing and likely will be accompanied by falling used car prices as time progresses. Whether the price cuts for new models have been picked up by the inflation numbers I am not sure as I wonder if the scrappage schemes are treated separately but the truth is prices are lower. Ironically this could easily be the sort of deflation scenario that central bankers are so afraid of as we note the risk of both falling volumes and prices. That is bad for debt which of course the car companies are carrying plenty of.

Term Funding Scheme

The problem is that the bubble in car finance has been fed by the easy credit policies of the Bank of England. Last August it gave all this another push with its Bank Rate cut and extra QE. But personally I think the real push came from the Funding for Lending Scheme of the summer of 2013 which is now the larger Term Funding Scheme. It went into the mortgage market and some washed into the car market and here we are. Unless we were all going to have 2 cars each there had to be a limit.


So we see issues in the real economy of a nudge lower to consumption and a smaller impact on production with ironically a fall in imports. However as we see lower prices and lower volumes the real issue is how the credit market which has built up copes. We are of course told it is “resilient” and that the Bank of England is “vigilant” and the latter may for once be true as after all it hardly wants word to get around that it was there 3/4 years ago with some matches and a can of petrol! How about QE for car production? Oh and a government scrappage scheme for diesels as well…….




28 thoughts on “Will car loans be the canary for UK unsecured credit?

  1. This is truly staggering, for the bulk of the UK auto loans to derived from the FLA raises the question who is looking at and regulating them exactly???

    They provided over £40billion in new loans last year – so who is responsible or should I say liable should these loans go bad?

  2. I decided to wait and see what would happen with regards to penalties being applied to new vehicles and diesels in particular (pardon the pun) and so I postponed changing my car. Having driven it around for a further 6 months I have decided there is nothing wrong with it and I am going to keep it for a few more years. The lack of clarity about where this is all going has cost them a sale! And I bet I am not the only one.

    • Financially it is reduced depreciation vs increased repair costs. Depreciation usually exceeds 15% of value, where repair costs usually stay under £1000 per year. An extended warranty to protect against large bills may be considered.

  3. Car purchases are always the last canary to sing before the house price collapse – just as in 1991 and 2008 http://www.independent.co.uk/news/business/news/new-car-sales-see-biggest-drop-since-1991-996161.html

    It is just basic economics – once your housing costs rise (usually int rate raises, but this time the capital component), you can first cut back on discretionary spending, then it is shopping in Tesco rather than Waitrose (see Tescos latest results). Then it is the car – in good times, we might change every 4 years or so, esp on the new plate (ie: for these figures!) – and white goods. Cars especially are a bit tricky – they are not weekly consumption but they are not that long-term assets, especially given their depreciation, so they are tough to categorise – but their signal is the same. look round your local streets and you will see when cars were last bought. Not many around the 59, 10 and 61 plates. It is easy to run a car on for a few years these days as they are built to last, so what happens – reluctant to take on more debt (as most of us have to), consumers delay the purchase. Just house prices then – so Nov rate rise looking less likely (esp as it is linked to may’s fate).

    Somebody said “You cannot buck the market”.

      • Big deal! I was paying 7% on a 60% LTV when I bought my first house for £21000, this then rose to 14.5% over 2.5 years!!It then fell back to circa 8% over the next 2 years. I saw my old house advertised a week ago at £65000. Out of curiosity I checked the ONS RPI all items index and found that for my old house to have paced inflation and cost the same in real terms as it did when I bought it, it needed to be £63000.

        Oh if only I were one of the young today, having to pay 3% more in real terms than 30 years ago and then having to shoulder a mortgage rate one sixth of what I paid at time of purchase and less than one tenth of what I paid at the highest rate!!

        • You obviously weren’t buying in London or the SE then. Maybe the house is in the Welsh valleys or NE somewhere……..maybe even in an ex-mining area.

          • North West. But the truth is the truth if you are the one who doesn’t like my post, isn’t it always the same that we don’t like the truth, especially the Establishment. I’m surprised to see Establishment type behavior on this blog where commenters put forward that they disagree with/dislike Establishment behaviour, until it doesn’t suit them that is…..

          • One other thing – the mortgage rate is the same no matter which part of the country you live in so it remains the “unpleasant truth” for the whingers and whiners that even those in the South East and South West were paying interest rates 6 times greater than today, so for the monthly payment to be the same in the South East purchase prices must be 6 times greater than they were 30 years ago Welcome the world of reality that so many on here profess to know so much about.

  4. Hi Shaun
    Very interesting and worrying topic.
    Massive over capacity of vehicles which have a lifetime two to three times greater than cars built 30 years ago nearly all purchased on lease agreements.
    They are struggling to sell the excess capacity the leasing arrangement is building up a glut of 3 year old vehicles which will cause a price collapse in second hand market
    There is trouble ahead

    • I was somewhat surprised to see how far my insurer had reduced the market value of mine – it is 3 on next renewal.

    • No question. The risk for leasing agreements lies with the financier of the car dealer. To me it seems unduly cheap to lease a very expensive car for 3 years, even allowing for strict damage repair criteria, a large-ish lump sum up front and very high charges for over-mileage. That can only mean that the market value of ex-lease cars has been over estimated. The gap between the auction value and the implied value in the lease could be a very large sum indeed, taken over the industry as a whole. The problem will show up in a couple of years time, and will not be made any easier by the whole diesel issue. Diesels are even now slumping in value. Would you own one if the government could levy punitive taxes at any time it desired?

      • The devaluation for damage and high over mileage charges will negate the gap between auction and implied lease values. I saw all this happening in the same products back in the 90’s.

    • Wow!! Cars lasted 8 years 30 years ago, so now they last 16 – 24 years!!! Looks like theres a way to go for loan term extensions then!!!!

  5. Shaun, I hope the initial prognosis on your acl op is good?
    Regarding the cars, a very insightful observation there are both faling sales volumes and falling prices , now that is a toxic reality that ivory towers do not like.
    You finish with a rescue scenario which I think is well judged. £41bn is a lot of debt to go sour.

    There are other things going wrong in the UK now, it seems social tenants are being evicted from private rented accomodation…..

    • Largely because of Universal Credit. The 5/6 week gap when the old benefits are ended and UC takes over. The claimants benefit is NOT backdated and the claimant LOSES 5 weeks benefit. Note: Social housing landlords are now requiring their tenants to build up 5 weeks advance rent as a buffer for the inevitable loss when their tenants go over to UC.
      This comes at a time when the social landlords are rapidly changing to Ltd company and moving to other sources for finance to operate, rather than government. This they hope gets them away from being forced to sell homes under a renewed right-to-buy…

  6. The traditional auto manufacturers are at risk of disruption. I read an article about a firm (I think BMW) who analysed the business of providing transport on demand as a service using autonomous vehicles. They concluded there was no way to keep current profitability and dropped the idea.

    Transport as a service eliminates many costs and problems for city dwellers. Parking, depreciation, maintenance, insurance and so on. Even charging stations for electric vehicles benefit from economy of scale with large transport service firms. There is huge investment in autonomous vehicle technology and it is reasonable to predict the establishment of transport as a service companies using autonomous vehicles. Uber and others are working on this and it may happen within a decade.

    • Hi Expat

      I have been considering getting rid of my car as for where I want to go I find that Boris Biking covers a lot of it. I still have a need for occasional use and especially right now for shopping after my knee operation. I also note that I see more and more Zipcars around so your theme is already on the march.

  7. I’d ask whether govt scrappage schemes constitute illegal state aid – but the EC is unlikely to act. There are 2 sides to a transaction – those who don’t borrow and buy used cars will benefit from a burst bubble. Likewise – falling house prices would benefit the younger generation who are priced out of this bubble market.

    • “Likewise – falling house prices would benefit the younger generation who are priced out of this bubble market.”

      Hardly – reference my reply to david hollins above……

  8. I’m a bit confused here. The EU has a quite strict set of emissions criteria for various types of vehicle, and for cars they have been working very slowly up to ‘Euro 6’, which is quite strict on Nox but apparently far less so for PM2.5. What is going on? Suddenly our courts and government have found that the EU has been dragging its feet, presumably because the cost of really cleaning up diesels is so high that it would hit the German car industry very hard. Not to mention Mutti’s election prospects. Dragging the feet to the point that 40,000 people are said to have their deaths advanced in the UK each year. (If you believe the statistics, which I fear I don’t.)
    Why is no criticism made of the EU itself and its ever-lagging standards? Why are EU specialists not publicising the realities of diesel exhaust emissions? Suddenly it’s all to do with the UK consumer, and nothing whatever to do with the mostly German producer. Can’t our politicians mimic their US counterparts and highlight the wretched behaviour of the EU and its car makers?

    • Ne’er mind, soon be out of the EU and then poverty and disease of all kinds will by wiped from the face of the UK…..

  9. This information is really helpful, I think there are some Car Finance Company those who provide Car Finance on bankruptcy, poor and bad credit also. I really appreciate it for sharing as this article is very helpful and interesting 🙂

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