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Creditfix LB 03-2017

Could Car Finance Drive Economy Over the Edge

The rapid growth in vehicle finance is causing some analysts to fear that the consumer debt burden created could be a danger to the UK economy in the future.

Vehicle finance is now second only to the mortgage market in terms of lending, having grown from ?32.7 billion in 2014 to ?41 billion in 2016.

Very few vehicles are now purchased outright, with finance options such as Hire Purchase, Personal Contract Purchase, or Personal Contract Hire contracts being used instead to spread the cost.

Personal Contract Purchases (PCPs) now account for around 80 per cent of all new cars sold according to the Society of Motor Manufacturers and Traders.

These plans, with less daunting monthly payments, mean that consumers often choose a more expensive vehicle option due to the vehicle having a higher residual value which makes the monthly payment more affordable.

They also encourage the consumers to change/upgrade their vehicles more often, which is good news for the motor industry.

However, despite the huge growth in vehicle finance, the process by which vehicle finance is sold to consumers has remained largely the same.

This has caused some analysts to question whether the PCP business model is sustainable and also raised concerns over potential miss-selling.

Affordability for the monthly payments during an economic slump has also been questioned, following the financial crisis of 2008.

The UK?s Financial Conduct Authority (FCA) has now decided to investigate the vehicle finance industry, to look at exactly how the finance is being sold, and to who, to ensure that correct consideration is taken by the lenders.

It is expected that stricter regulations are likely to be put in place once the findings are revealed early next year, together with potential fines for lenders considered to have lent irresponsibly or failed to follow due process.

With the growth in vehicle finance racing ahead, could it drive the economy over the edge? Only time will tell.

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