Experts warned that cheap finance wouldn’t last. Our consumer champion explains where it went wrong – and how you can avoid being sucked in
So-called “toxic” car loans have been a worry in the UK since early 2009. The reason why so many people are driving cars they could not normally afford is a method of financing called a Personal Contract Purchase (PCP), a scheme imported from the USA in the 1990s, while finance deals as a whole now account for almost 90 per cent of new car payments.
At the beginning of the deal, the car is given a Guaranteed Future Value (GFV). This is subtracted from the forecourt price. The buyer then puts down a deposit and makes monthly payments covering the price of the car minus the GFV, but interest on the whole of the price.
At the end of the term, he has the option of buying the car for the pre-determined GFV, or handing it back to the dealer and walking away with nothing. If, at the end of the term, the car’s trade value is more than the GFV, he also has the option of using this equity in the car as the deposit for another PCP on a new car.
So what’s the problem?
Where all of this come unstuck is when, in order to make monthly payments appear more tempting, manufacturer finance houses placed unrealistically high GFVs on the cars. The manufacturers, finance houses and dealers are then stuck with cars that owe them far more than can possibly be realised.
This situation is compounded by PCP buyers biting off more than they can chew. They can legally escape from the deal if they have paid off more than 50% of the amount financed (that is, the whole cost of the car, minus the deposit they paid). But they would need to be very deep into a PCP deal for that escape to be available.
What is happening now is that buyers who were already stretched to finance their cars on PCPs are losing a substantial proportion of their incomes due to coronavirus, cannot keep up the payments and are returning the cars or seeing them repossessed. Chasing these buyers through the courts for their debts is slow and time-consuming.
But, even worse for the manufacturers, finance houses and dealers are having large numbers of cars returned with very little market for them; people simply aren’t buying.
The Finance and Leasing Association (FLA) has said that forbearance measures may include payment breaks, payment reductions or waiving interest: “Lenders are working flat out to provide help but with their own staff numbers reduced due to coronavirus it will take longer to get through.”
What are the car manufacturers doing?
Volkswagen and Ford said they have already introduced emergency measures to help customers. VW, whose brands include Audi, Seat and Skoda, said it is taking “exceptional steps” to help customers on PCP plans to keep hold of their vehicle.
They will be offered up to 60 days in which they won’t be chased for payment or rack up extra fees. The manufacturer finance houses will also consider extending the period of time for the buyer to pay off the debt.
The other side of the coin is that most car manufacturers have now stopped production of new vehicles. Many potential new car buyers will simply put off their purchases.
Others may take advantage of the glut of cut-price PCP returns and snap up the better deals. So the market will be chaotic for a while.
What happens when the pandemic has passed?
After the coronavirus crisis is over, manufacturers, finance houses and dealers will have to recoup their losses. So there is only one way that car prices car go. Up.
And, of course, government support to keep the car industry running will need to be paid for by increased taxes, leaving even less disposable income for the public to buy expensive items such as cars.
And can I get an insurance refund?
If you have “locked down” your car and it is parked in the street, it has to remain insured and taxed, with a valid MoT roadworthiness certificate – even if you’re not using it. If you need to re-tax it during the six-month MoT “holiday” then you still need to apply for an MoT in order to be issued with a recorded exemption or the online system will not work.
If your car is off the road on private land, it still has to be “continuously insured” unless you make a Statutory Off Road Notification (SORN) that the car is being kept off the public road.
But unless the vehicle lock-down goes on for months, it is probably not worthwhile cancelling your insurance because the administration charges will probably wipe out any benefit.
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