Used car market – a financial threat?

Is Britain indebted to the used car market? But is that debt steadily undermining the used car market itself and posing a threat to the nation’s overall financial security?

As was argued in the Financial Times’ edition of the 25th of June 2017, there are certainly a number of economists – and even some within the industry – who think so.

Is the ready availability of car finance to blame?

Against the background of record numbers of new car sales and a booming trade in used cars, the economic argument for concern about such an apparently healthy state of affairs is relatively complicated.

Fuelling the demand for new cars is the widespread availability of credit, it is said. According to the Finance and Leasing Association (FLA), 86.5% of new cars are bought using some form of car finance – the most popular solution being a Personal Contract Purchase (PCP), which gives the customer the option of purchasing the vehicle at the end of the contract (at its predetermined “residual value”) or simply handing it back and embarking on a further PCP for a further new car.

As a result, 2016 saw a record 2.69 million new car registrations, according to statistics compiled by the Society of Motor Manufacturers and Traders (SMMT). These sales are estimated to have been facilitated through the advance of a total of £18.6 billion in various forms of car finance.

The used car market

The used car market appears to be even more buoyant, with more than 8 million transactions being recorded in the same year, purchased through a total of £14 billion of credit, says the Financial Times (FT).

Some economists argue that trading in both new and used cars which is reliant upon such massive levels of debt is simply unsustainable – and, therefore, a threat to the economy as a whole.

Already, there are signs of increasing rates of depreciation in used cars. The FT cites figures suggesting that a second-hand car under two and a half years old is currently worth less than 58% of its original value, compared to just over 61% three years ago.

To a certain extent, this reduction in value may reflect changing attitudes towards car use and ownership. Rather than outright purchase, the popularity of current finance deals makes monthly payments for continuous use of a more or less new car that may be changed every three years as each PCP agreement draws to its conclusion – use of a car has become almost akin to a mobile phone contract.

The impact on the market for new cars may be deceptive. On the one hand, such strong demand for a new car every year boosts manufacturers’ ability to sell higher-value vehicles. But that trade is also dependent on those new cars maintaining a relatively high residual value – a risk that is subject to changes in the market and one which falling used car prices seem to be make worse.

Somewhat paradoxically, therefore, the falling prices of used cars is likely to increase the cost of new cars, since manufacturers become unable to offer such attractive finance deals. Counter-intuitively, therefore, this raises the prospect of customers having to pay more in monthly repayments on their car finance deals.



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