MPs have called for the car finance industry to begin publishing the details of defaults and arrears rates, as concern about the amount and type of finance being offered continues to grow. Concerns about the health of the car finance industry and the value of vehicles have led to MPs asking questions about how these deals are being made.

Massive losses

Banks and finance companies could see losses of some £1.7 billion if the value of second hand cars keeps falling, according to the Bank of England. Around £17 billion of major banks’ cash is directly exposed due to the way that car prices are inflated at the moment because there is always a fear of a collapse. This could see around 10% of the value being wiped out.

The root of the problem is that too many people are buying cars on finance and this fuels a debt boom. Many of them use a personal contract plan, which lets them make monthly payments across a fixed period. At the end, they can then get cash to put down a deposit for another car, based on the value of their current car second hand.

Concerns about finance quality

The other reason that MPs and experts are so concerned about the situation is the finance quality that is being offered. For example, young drivers are being tempted to take car finance on deals that mean they pay no deposit up front. These deals do not take into account whether the young people are unemployed, are on low incomes or have a poor credit rating.

The deals mean they pay hundreds of pounds every month for cars worth up to £20,000. If they don’t keep the payments up, they face having the vehicle repossessed and court orders to make them pay the balance.

Examples include a 24-year-old who was shown by the salesman how to write a credit check form so that he could be accepted, while in another case a salesman tried to sell a £15,000 Audi to someone who was out of work. Older drivers are also being targeted, such as the 71-year-old left with a £3,500 debt on a car after having a heart attack.

Financial crash

One investigation by the Daily Mail found that irresponsible car dealers could risk another financial crash by offering loans to people that they can’t afford and wouldn’t be accepted for under other circumstances. If there are huge numbers of defaults on these loans, it could cause a ripple effect that could lead to another financial crisis.

The situation has eerie similarities to the situation in 2007, with car finance firms selling some £5.5 billion in risky loans last year – double the figure of the year before. The Bank of England has said that drivers now owe £58 billion in car finance, an increase of 15% on 2015’s figures.

Sensible borrowing

In most cases, drivers do need to pass credit checks. However, these checks aren’t as comprehensive as with other types of finance and there are no checks to ensure someone can afford the loan. As long as the driver doesn’t take a loan with a monthly repayment that exceeds more than a quarter of their take-home pay, they are deemed fit to pay. This means that drivers earning £8,200 a year could potentially buy a new £12,500 Ford Fiesta.

MPs and campaigners are calling for a crackdown on these ‘reckless’ tactics. Meanwhile manufacturers Vauxhall and Suzuki are investigating the conduct of their own dealerships. Furthermore, the Financial Conduct Authority (FCA) has already said it is investigating ‘irresponsible lending’ in the motor industry.

Do you think the subprime car finance market has the potential to cause another financial crash? Have you taken out a car finance plan without knowing the consequences? Let us know in the comments below.

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