As our car dealer insurance customers know car financing is huge business and something that almost all dealerships offer. However booming consumer credit and car finance do come with a risk for dealers.
The fact that consumer credit is growing faster than incomes is a big source of concern and Bank of England Governor, Mark Carney has warned of its risks, particularly for car dealerships, who are offering finance to customers at a greater rate than ever.
Although car finance is different from other sources of credit because it’s secured by the vehicle itself, this doesn’t mean that there’s no risk for dealers since the vehicle can depreciate significantly over the term of the loan.
Speaking about this issue, Carney said –
“Arrears rates on dealership car finance tend to be lower than for other forms of consumer credit. Unlike most other consumer credit, this lending is secured, with the vehicle acting as collateral.
“But the value of this collateral declines over time, and is dependent on conditions in the used car market. Exposures to PCP lending may be particularly sensitive to market conditions.
“If the borrower chooses to return the car at the end of the loan, and the value of the used car is less than the outstanding loan amount, the lender will make a loss.
“Lenders can seek to mitigate these risks by making conservative assumptions about the future value of used cars, though these assumptions are inherently uncertain.”