Coronavirus: Are we heading for a car finance meltdown?

There have been many promises made by the government and by different industries to support consumers and industries that have been hit by the global coronavirus pandemic. But one sector that hasn’t received much of a mention is the car finance sector.

But this enormous sector – now up to £48 billion a year – is under unprecedented pressure as huge numbers of customers face a loss of income due to the nationwide lockdown caused by the spread of the Covid-19 coronavirus.

While the government was quick to ensure that all homeowners were able to take a three-month payment holiday from their mortgages, followed by provisions to protect renters, there has been no announcement whatsoever to protect and manage car finance debt. Yet for millions of households, car payments are the second-largest monthly expense after their mortgage/rent payment.

There are two big problems that customers have been asking us about:

• Difficulty in keeping up with car finance payments due to coronavirus-related loss of income
• Expiring PCP car finance agreement or PCH lease agreement, and no way to change their car because dealers are all closed

Your car finance agreement has no provision for loss of income

Many people are now finding out for the first time that there is nothing in a car finance agreement to cover you for loss of employment. It doesn’t matter whether it’s an individual job loss or a nationwide layoff, you still have to make your payments every month.

We’ve talked about this a lot for several years now, pretty much whenever we talk about car finance. Across the car industry, the response has always been that people shouldn’t borrow beyond their means, and should always have money saved up to cover themselves in case of sudden financial hardship. It’s not the industry’s fault, they insist.

Well, the industry is about to find that tens of millions of car finance customers are facing some level of financial hardship. There could be a massive problem if millions of customers can’t make their car payments over the next couple of months. Various sources have told The Car Expert that customer enquiries regarding financial hardship have increased 20-30 fold (even more in some cases) in the last couple of weeks. There is concern for the ability of some lenders to survive this pandemic if dealerships remain closed for more than a couple of months.

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What if your PCP agreement is expiring and you can’t change your car?

Thousands of car owners will have PCP agreements that expire in April and May. Normally, all they’d need to do is head down to their dealership of choice to part-exchange their car on another one and start a new PCP. But they can’t do that because dealerships are closed.

Once again, many people are about to find out for the first time that a PCP balloon payment is a direct debit like their normal monthly payments. If you don’t take action, the lender will try to take the money from your account. Since you probably don’t have the thousands of pounds in your account to cover it, you will default on the payment. That triggers a default response from the finance company, and probably a penalty fee from your bank as well.

If you have a balloon payment that is due to be paid in the next few weeks, call your finance company ASAP to see if they can make alternative arrangements. If you’re not sure about how many payments you have left before the balloon is due, check it right now so you know where you stand. Come back and read the rest of this later.

The Finance & Leasing Association (FLA) has provided some useful additional information about this, which we’ve posted at the end of the article. If you know who your lender is but you don’t have their contact details to hand, the FLA has a handy contact list for all the major car finance companies.

Car companies lack any proactive initiatives

The car manufacturers and their associated finance companies appear to have made no effort to come up with initiatives of their own to support their customers, which is no great surprise. The industry has always been great at taking as much of your money as it can get, but terrible at helping you out when you need it.

I spent several hours trawling through coronavirus/Covid-19 information on dozens of UK car company websites on the weekend to try and find out what policies they all had regarding customers with expiring PCP agreements and customers struggling with payments, and they were almost universally terrible. Despite loudly providing support for servicing, warranties, roadside assistance and other measures, initiatives for car finance were completely non-existent.

Most didn’t have any Covid-19 car finance information on their front page, so when you eventually clicked through to the right section, it basically amounted to “Call us if you are in financial difficulty” rather than providing any across-the-board policies that give customers clear guidance. This is then usually followed by “We’re experiencing high call volumes and reduced staffing, so please don’t call us”. This is not remotely helpful.

We are in the middle of a national economic crisis, with up to half of all employees expected to furloughed or laid off within weeks. The car industry’s “call us to explain why we should help you” approach is not providing sufficient guidance and assurance to millions of consumers with large amounts of car finance debt. For most households, car payments are their second-largest monthly expense and millions of people are very stressed. Having to keep paying a few hundred pounds per month on a car could easily be enough to drive tens of thousands of people into bankruptcy.

Car manufacturers and dealers are currently falling over each other to come up with press releases and social media posts that tell everyone how they are offering all kinds of support key workers. In fact, they have managed to turn laudable initiatives into desperate attempts for publicity and validation (I read a dealer principal describing one of his technicians as a ‘hero’ for literally helping a key worker to change a light bulb…). Yet when it comes to the 90+% of their customers who have a car finance agreement of some kind, there’s been a total lack of interest.

Ford has managed to come up with a cashback/payment deferral scheme to help people buy a new car or van, in addition to 0% finance offers on most cars in the range. But this is only if you order a new car online in April or May (even though you might not actually get it for months because the dealerships are all closed). It’s a good initiative, but does nothing to help customers who have a Ford on a Ford Credit finance agreement right now.

If you go and look at the Ford UK website, there is no visible information about Covid-19 support anywhere at all. If you search for “Covid-19” (and don’t forget the hyphen or it won’t show anything at all), there is a page with some information. But it’s not particularly helpful and there are no offers or initiatives being rolled out across the board. Just more of the same “call us if you’re in financial difficulty” nonsense.

Start presenting some options up front

If car companies can come up with policies and initiatives to help sell more cars while their dealerships are closed, surely it’s not beyond the realms of possiblity that they can come up with policies to help their existing customers. But they haven’t, and they probably won’t.

The car companies that did respond to our questions argued that their hands are tied by the Consumer Credit Act, therefore “there’s nothing we can do”. While it’s certainly true that the Consumer Credit Act was written without consideration for this sort of situation, that doesn’t stop finance companies proactively presenting some options to their customers rather than sitting back and waiting for customers to call and ask for help.

Of the car finance companies that we spoke to, the most helpful and detailed answers came from BMW Financial Services, who pointed out that they have ramped up their customer-facing team numbers by re-training and redeploying a ‘significant number’ of employees to deal with customer enquiries. Even though they are operating at a higher than normal capacity as a result, waiting and response times are still significantly longer than normal due to the sheer volume of enquiries.

The finance companies told us that they have a menu of options to offer customers in financial difficulties. These include voluntary termination, payment holidays, reduced monthly payments, waiving interest charges and so on, although the options depend on the type of agreement and the customer’s particular situation. If your PCP or PCH agreement is ending shortly, they have options for you to avoid balloon payments and advice on holding onto a car until it can be collected. (For example, BMW explained that you’d need to cancel your registration, declare the car SORN and keep it off the road. They will then insure the vehicle until they are able to collect it.)

What the finance companies need to do is start proactively presenting and explaining these options to customers, so customers can understand what options may be available before they pick up the phone. It would provide much clearer guidance and stronger assurance to customers who simply don’t know what options are available – repeated research has shown that customers struggle to understand how car finance agreements work when things are going well, let alone what happens when things go wrong.

The government needs to ride to the rescue

Even if customers are able to avail themselves of some kind of support from their finance companies, the Consumer Credit Act (CCA) is still problematic. Some support mechanisms will trigger legally-required default notices or warning letters to be sent to customers, and most options require the same credit checking and application forms as a new finance agreement (basically because they often require a new finance agreement).

The Finance & Leasing Association told The Car Expert that it is in constant communication with the Financial Conduct Authority (FCA) and the goverment about fast-tracking changes: “We are speaking regularly to the FCA and HM Treasury regarding how the CCA complicates and lengthens the process of providing help, and the impact this is having on already high call volumes.

“We’re also in touch with Government to ask that non-bank lenders have direct access to financial support schemes so that they can readily support the increased demand for forbearance from businesses and households.”

Ultimately, only the government can override or amend its own legislation. So if the Consumer Credit Act is not fit for purpose in the current emergency, only the government can remove that hurdle. And if the finance companies are unwilling or unable to offer across-the-board measures to support millions of customers who are at risk of financial hardship, it will have to be the government that steps up to do it for them.

Unfortunately, it’s not as simple as the three-month payment holiday that the government ordered banks to make available for all house mortgages. But I’m sure that there are a lot of clever people in the Treasury, the FCA and the FLA who can work out something – and they need to, fast, for both consumers and lenders.

Will coronavirus finally burst the PCP car finance bubble?

In many ways, the car industry is now reaping the harvest of throwing enormous amounts of money at anyone that walked through a showroom door for the last decade. We’ve talked about this at length before, but the PCP car finance juggernaut that took the UK new car market to records heights in the first half of this decade was always an unsustainable boom.

New car registrations have been falling for the last four years, and the coronavirus shutdown has now brought the industry to almost a complete halt. Even though we have no idea when life will get back to normal, it seems likely that the car industry is going to be fundamentally changed by what is currently happening.

The car industry loves to blame everybody else when things go wrong (Brexit has been the big baddie for the last few years, along with the media “demonising diesel”), but falling sales over the last four years are a direct reaction to the unsustainable growth of the previous few years.

The PCP boom really kicked off a decade ago with the government scrappage scheme. Basically, anyone could get a couple of thousand pounds for their old banger to use as a deposit, and could get a brand new car (usually a Kia or Hyundai) for £99/month. Car manufacturers rushed to jump on the PCP bandwagon, and customers switched from buying Vauxhalls and Renaults to buying BMWs and Audis because the payments were achievable.

However, steadily increasing new car prices, combined with falling used car values, started making car finance payments more expensive. In response, manufacturers and lenders started advertising longer terms (four years instead of three years). But that was only a temporary solution to keep selling cars – if you switch all your customers from a three-year PCP to a four-year PCP, you won’t have any customers in three years’ time. And that’s exactly what has happened.

There’s no doubt that the coronavirus pandemic will drive a lot of car dealerships into bankruptcy. Possibly some finance companies, and maybe even some car manufacturers. The entire car industry is reliant on people buying cars they don’t need with money they don’t have.

I’ve been banging on about this for years. No-one needs to buy a new car, but people want new cars. You can get away with that sort of selling when times are good and everyone can afford their finance payments. But when the money runs out, you’re in trouble. The car industry, on the other hand, really does need us all to buy millions of new cars each year.

Supply is greater than demand, and that problem is getting worse each year as demand keeps falling. Yet whenever I’ve suggested that the car finance industry is exposed to significant risk if the market takes a turn for the worse, the standard industry response has been to laugh it off and say that it would take a really enormous crisis to derail the industry. Well, guess what…

The car industry has also been slow to embrace online sales, partly because of the long-standing and complex relationship between car manufacturers and the dealer networks who sell their cars. A lot of those complexities may finally be swept away as a result of this crisis, so we could see a smaller but far more modernised automotive retail world emerging once this is all over.

Coronavirus car finance FAQs from the Finance & Leasing Association

The Finance & Leasing Association represents all the major car finance lenders in the UK. These FAQs, and other regularly updated information, is posted on the FLA website.