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The UK Car Loan Crisis: Your Loans are a Scam

Nouse Bossiness Corespondent Hasham Yaqoob explores the increasingly growing and pernicious U.K Car Loan Market and its long time implications of U.K private debt.

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Image Credit: Helgi Halldorsson

The Car Finance market bubble has been under prying eyes for the
last few years. In 2018 the UK car loan debt was £17.8 billion with Brexit
generating seemingly no reticence from companies handing out more loans to
customers. There were serious concerns that we would be heading for a financial
market collapse on the same scale as the 2008 mortgage crisis, however such
concerns are overblown, and often make the mistake of conflating the British
car loan industry with the much more ridiculously unstable American one. In
comparison the car loan industry is smaller, and car loans in general are less
reliant on banks than mortgages. So, the dithering forecast that we will enter
another crisis on the same scale as 2008 is overblown. However, to downplay the
damage that this irresponsible practice is inflicting is to continue aiding and
feeding the predatory machine that these loans thrive off. 

When you hear the word subprime, you might recognise it from being thrown
around during the 2008 recession or from Margot Robbie in a bubble bath.  Subprime loans are loans given to borrowers
who may find it difficult to maintain regular payments on normal loans. This
way they can sell car deals to owners and keep the profits rolling. For the
most part this has worked out well, even during the last crisis, car loans
remained generally paid. However, Subprime PCP loans have become more popular
in recent years, allowing Britons to purchase the latest vehicles on a pay by
monthly scheme. Lately with recent cuts and austerity measures, the number of
borrowers struggling to pay back these loans is multiplying putting a great
deal of UK citizens in debt.

In a 2018 survey by CarGurus,  9 out of 10 people with existing  finance arrangements  admitted that they didn’t understand  the small print in their contracts, leading
to 47% of Britons not knowing how much they have borrowed for their automobile,
and 53% didn’t know what PCP stood for. (Personal contract purchase.) All this
is often blurred and buried under complicated jargon and small print, and this
lack of transparency in the process is tricking desperate owners into
purchasing cars with money they do not have.

This has detrimental consequences. According to a BBC article “Car Payments are ruining our lives” these
loans tend to target naïve youths. For example, Victoria was a young university
student was encouraged to obtain £20,000 Audi on loan, with no need to show
payment slips or any safety procedures. After graduation, she had lost her job
and was unable to afford her payments and her parents took up the payments.
This eventually proved too much for them, landing them in dire financial straits.

The lack of safeguards is the same issue that helped pave way for
the last financial crisis, with banks offering loans to customers who frankly
had no right taking out such loans. This put people and families in crippling
debt, and many lost their homes. The same is happening now with PCP car loans. This
is affecting entire towns, such as affluent areas including Guildford.  From 2013 to 2018 the personal debt of the area
rose by 30% one of the highest rises at the time.

Now these loans have continued to thrive on the presumption that
Brexit will end with a deal, and that no worldwide catastrophe would cause the
entire economy to come to a screeching halt and for the job market to shrink
exponentially. In 2020, the covid-19 pandemic has exacerbated the problem, what
was before a manageable market bubble is now threatening to pop. The FCA has
rightfully granted extensions until October for millions of people, offering
relief in trying times. However, this has the similar effect of eviction bans,
with it simply being a case of kicking an empty can down the road. These pay
holidays are a temporary measure for a much larger problem, as stated before
this issue has been building up for several years. Long after the coronavirus
is over, millions of motorists will still be struggling with car finance
payments. Motorists nearing the end of their contact may be hit hardest with
monthly charges and balloon payments often higher at this point compared to the
start.

The Car finance industry is a ticking time bomb relying on
predatory practices and lack of transparency to keep afloat, although the
industry has done its best to manage this bubble, major changes are needed to
prevent a Car finance meltdown. In May Automakers finance divisions lobbied
Bank of England for a bail out. There will be a market crash. It will not be on
the same level as the 2008 crash but with uncertainty over Brexit and a current
recession and possibly depression, the question remains, who is going to pay
for it?

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