Subprime cars: are auto loans leading us to the next financial crash? | Loan and debt
A huge increase in the amounts borrowed by already indebted households in Britain and the United States to buy new vehicles is fueling fears that “risk cars” could trigger the next financial crash.
British households borrowed a record £ 31.6 billion in 2016 to buy cars, up 12% from the previous year, the Finance and Leasing Association said on Friday. Nine out of ten passenger car buyers are now using personal contract plans (known as PCP), which have exploded since interest rates fell to historically low levels.
Under these cheap leases, buyers pay a small down payment and then agree to make a monthly payment for the next three years with the option of buying or returning the car at the end. The increase in PCP helps explain the skyrocketing car sales in Britain despite stable or declining household incomes. A record 2.7 million new cars were sold in Britain last year – the fifth consecutive year of increased sales. On a per capita basis, the British buy more new cars than any other major country in Europe.
UK auto finance is a ‘flashing light’, according to Andrew Evans, fund manager of investment firm Schroders. “Borrowing is a very bad idea when done against a depreciating asset… like a car,” he said, adding that there was a “serious level of fragility built into the system”.
In the United States, people also over-buy cars. Last year, the total stock of outstanding auto loans jumped to $ 1.1 billion (£ 880 billion) in the United States, prompting Harry Dent, a financial commentator, to ask: “Could cars be our death this time around?“