There was a time when the majority of lenders were thwarted by the subprime crisis, which had deep-rooted link to real estate and mortgage. A decade later, cheap car financing is giving way to subprime car lending; a living eco-nomic gloominess. The financial growth of the UK has largely been supported due to cheap financing in the last few years. However, the debt-fuelled bounty in the form of low interest rate car loans has a documented proof of earnings.
Merits of Car Loans Available on Low-Interest Rates
Ever since the Fin Tech market entered into mainstream lending, and new age lenders have come with innovative offers; cheap car financing is the most obvious result of it. Filling loan application form in digital format takes not more than three or four odd minutes. Borrowers who have modest income resource visit the supermarket and drive home in brand new SUV. More importantly, loans are approved in a hassle free way.
Where is the glitch? Experts believe that payback of cheap car loans is likely to last for a longer duration than otherwise, the overall situation becomes appalling.
Are Ultra Low-Cost Loans Ominous for Financial Health?
There are two parallel schools of thought, which prevail in the low-cost car financing industry. According to a more optimistic opinion, low-cost car loans, which comprise more than 80% (known as Personal Contract Plans (PCPs), are secured. Subprime lenders who provide loans to people with inconsistent or unreliable income source come out only 3%.
On the opposite side, there is opinion voiced from sceptics, who have begun to believe that high frequency of lending is likely to cause a sudden rise in the rate of unemployment and as well as a rise in the interest rates. This would probably result in the occurrence of destabilising events within the short span of time.
Here, many economists from the government-controlled Bank of England argue, increased reliance on PCP, would take the UK’s lending industry into macroeconomic downturns, and this certainly is not the myth. Substantial concerns grow inside the banking industry, which for several decades, providing the base financing, is showing the insipidness, similarly to what it did before an occurrence of financial crunch of 2008. Economists find that critical economic problems will show up as the industry has gone ignorant on introducing standardised methods of calculating the arrears and repossessions. This clearly points that lending to 3% population would have a catastrophically chilling effect.
In this respect, The Finance and Leasing Association (FLA), which is the prominent trading body for consumer-credit and car lenders, have found that PCPs are offered conscientiously to borrowers showing a strong credit score, but there are critical problems in lenders’ credit scoring policies, which are somehow maintained in secrecy.
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Distraught car buyers, who have dishonoured loan deals backing them, are experiencing compulsiveness, to pay the sums. It is going to become tormenting for such borrowers for reasons that inflation is rising high and disposable incomes are reducing considerably. Experts in the UK’s finance industry have also started to believe that vulnerability and falling diesel car values would make situations critically sensitive. Forecasts on negative consequences in the lending industry, because of government’s decision to get tough on older diesel cars, is also gaining the ground.
Why Personal Contract Plans Becoming Popular
The whole and sole reason behind the popularity of PCPs is innovation in the method of loan calculation. It becomes interesting to know for a borrower that with this kind of innovation, interest charges and loan value is not calculated on the cost of the car, but on the depreciation cost. The borrower would, therefore, pay loan value on most recent depreciation. The elite and classy Mercedes, Audi, Volvo and Land Rover models that had lower depreciation value, came in the budget for people living on low incomes.
There is a flexing seen in the UK’s car market, where ‘Owner ship’ has outrightly been transformed into ‘Usership’. How this type of transformation is going to become effective?
Car deals, leased through the seller, are generally spread on the tenure of three years, with a limiting factor, and this gives natural privilege to car seller, who in fact retains whole ownership. It is on the customer to pay off the difference arising against the car’s value after the deal gets over. He may even hand the deal back to the seller for beging a new deal.
Car loans in Uk
PCPs are giving the way to a reduction in motoring costs. Customers come to realise that it is the lender who is paying the road tax. The lender is also providing Car loans in Uk against a small extra fee.
Cheap car financing advantage some where also relates to phone contract as the customer pays out pre-defined amount each month. Which in car financing comes over to sensitive factors such as the mileage, service scheduling and the overall maintenance. Once the contract is over, the customer will hand over the car back, and then selects a brand new car.
PCP Car Finance
There is a jocular side to this entire scenario. Many owners who bought their car and never looked back to clean or touch it have not thought about ownership. In this situation. They feel contended to hand the car back after the deal is closed.
PCP car finance is heavily based upon lenders’ ability to realise the guaranteed future values. This is only evident in case of the well-constructed used car market. However, in case there are several diesel drivers placed the consumer law for returning PCP-financed cars prematurely. Giving out all the early termination losses to respective lenders. The cost is expected to rise to such phenomenal levels that finance companies are more likely to crumble.