| Motoring Discussion > Finance co exposure to PCP | Miscellaneous |
| Thread Author: movilogo | Replies: 20 |
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New Fri 29 Dec 17 11:20
Finance co exposure to PCP - movilogo
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Here is an interesting article. It says the due to so many cars bought under PCP (~82%) nowadays, soon there would too many newish good conditions cars will flood the market and this can skew the market seriously (by lowering overall price of cars). uk.businessinsider.com/uk-car-finance-pcp-mortgage-market-morgan-stanley-2017-7 |
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New Fri 29 Dec 17 14:02
Finance co exposure to PCP - Bill Payer
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I do wonder what's going to happen. If used car values drop then PCP and PCH deals will need to go up in price - which will only serve to widen the difference in cost between new and used. Compared to elsewhere in Europe, indeed the world, used car already seem very cheap here - I reckon the twice yearly registration plate has a lot to do with it, although new car sales in France and Germany etc run at similar levels (relative to population) as UK. |
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New Fri 29 Dec 17 14:25
Finance co exposure to PCP - Falkirk Bairn
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A son was looking last week @ a new car - a 3 year old 6 series BMW was £26K & on PCP £600+ for a 3 year deal 10,000 a year - £5-6,000 in interest charges. Same dealer was offering January specials - 640d was some £599 / mth - the £60K +retail price was subsidised by £22K to under £40K & nigh on interest free credit. Would you rather have a 2 year old car or a new one for less money per month? |
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New Fri 29 Dec 17 14:45
Finance co exposure to PCP - Dave_
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>> Compared to elsewhere in Europe, indeed the world, used cars already seem very cheap here Could some of that be due to the lack of demand for our RHD cars in nearby LHD countries? |
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New Fri 29 Dec 17 23:41
Finance co exposure to PCP - Manatee
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A large proportion (I don't know what) of vehicles go back to dealers at the end of the primary period; others are purchased by the hirer for the GFV. Dealers are holding large stocks, potentially also funded by the same "shadow banks" that are writing the PCPs - so the finance companies might not even be off the hook for the stuff they have been paid out for if values drop hard enough and sink some big dealers. The problem that has always been obvious with GFVs is that the finance companies will only get the vehicles back in big numbers if and when the are worth less than the GFV. And if that coincides with a recession that cuts real incomes and raises unemployment, a lot of those cars will be poorly maintained and returned with defects, and possibly with payments still owing. I just about remember the UDT collapse,or at least the aftermath. These PCP lenders, like the finance companies of the 1960s and 70s, are not tightly regulated, certainly far less so than the banks now are. Among other things, the shock to the system in the 70s when it all went wrong also caused a 75% drop in the stock market IIRC. It's all looking inevitable and possibly more of an immediate threat than a bungled Brexit. |
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New Fri 29 Dec 17 23:47
Finance co exposure to PCP - DP
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>> The problem that has always been obvious with GFVs is that the finance companies will >> only get the vehicles back in big numbers if and when the are worth less >> than the GFV. That, and the reliability of the car will determine whether I buy at the end or hand back. Thanks to the finance company "contribution", the effective interest charge on the PCP over the term is trivial - a few hundred quid. I'm ssuirrelling a little bit away each month with the view of having my options completely open at the end. Last edited by: DP on Fri 29 Dec 17 at 23:50
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New Sat 30 Dec 17 00:03
Finance co exposure to PCP - zippy
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>>Dealers are holding large stocks, potentially also funded by the same "shadow banks" that >>are writing the PCPs - so the finance companies might not even be off the hook for the >>stuff they have been paid out for if values drop hard enough and sink some big dealers. Stock financing is quite common and my employer does it, so there is the potential for some loss but I guess not a total write off. Stock will not be financed at 100% of forecourt price. I also guess that the PCP lenders (if not a bank owned by the manufacturer) get some form of discount on list price which is not reflected to the buyer in all instances and a commission will likely be paid to the dealer for setting up a PCP deal. Of course interest payments in excess of the lenders costs of funds will also contribute to the overall deal and the margins are often in excess of normal loans because of the low deposits paid and reduced repayments model that is the PCP scheme - i.e. more interest is paid because capital repayments are lower. I look at my car and figure that the lease company has a reasonable margin. The list price is £29k (approx). Over 3 years I will be paying £15,000 and cost of funding to the lease company is about £25000k including interest. So they need to make £10k on a 3 year old high spec Tuscon. Two / Three year old models are £20k on Autotrader (but with lower mileage) so I guess there is some margin for the lease co. |
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New Sat 30 Dec 17 06:50
Finance co exposure to PCP - Manatee
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Is it a competitive market? If so then I would expect the annual RoA to be maybe 1%-2% net of 'normal' losses, commissions, and funding costs, at best. With average debt of c. £20k on a £29k car that's £600-£1200 and probably the bottom end of that. That would give them a healthy return on capital as they are presumably mainly debt funded themselves. Sounds good, but when losses start to increase and funding costs rise their only hope is to keep the wagon rolling. If they can't, owing to a drop in demand or withdrawal of their own lenders, the whole edifice will come tumbling down. |
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New Sat 30 Dec 17 10:53
Finance co exposure to PCP - Bill Payer
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>> I also guess that the PCP lenders (if not a bank owned by the manufacturer) >> get some form of discount on list price which is not reflected to the buyer Absolutely - hence the oft-repeated statement that the most profitable part of Ford was Ford Finance. There's a lot of gross profit in a car to spread around between the manufacturer, importer and finance company. Dealers get buttons. |
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New Sat 30 Dec 17 11:20
Finance co exposure to PCP - Hard Cheese
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Leasing/PCP is a gamble on the residual values and the end of the term. I reckon the manufacturers generally manage the market fairly well so as to maximise new registrations and feed good used cars onto the forecourts while ensuring that used prices don't plummet so increasing lease costs (and deterring new buyers). |
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New Sat 30 Dec 17 12:06
Finance co exposure to PCP - smokie
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| Going back a handful of years to when I knew a BCA director, I understood that the gamble was often on the part of the large auction houses e.g. BCA who offered fleet buyers a guaranteed value (obviously dependent on mileage/condition) at the end of leases. This went for hire companies too. |
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New Sat 30 Dec 17 12:35
Finance co exposure to PCP - Manatee
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>> Leasing/PCP is a gamble on the residual values and the end of the term. >> >> I reckon the manufacturers generally manage the market fairly well so as to maximise new >> registrations and feed good used cars onto the forecourts while ensuring that used prices don't >> plummet so increasing lease costs (and deterring new buyers). I'm sure they try. They can certainly spend to stimulate sales. But they can't control the wider economy. If their customers extend replacement cycles (PCP customers can refinance or trade down) because their real wages are falling or they have so much debt they can't take any more, then their only option is to try and get the costs to go down as fast as the revenue (they can't in the short term because so many costs are fixed) and hope they can hang on longer than their competitors. |
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New Sat 30 Dec 17 12:24
Finance co exposure to PCP - Manatee
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>> >> I also guess that the PCP lenders (if not a bank owned by the >> manufacturer) >> >> get some form of discount on list price which is not reflected to the >> buyer On some manufacturer promoted offers, presumably. Similar to Interest Free offers, the dealers probably get a more or less fixed small profit. But the tail risk on repayments and residuals lies with the manufacturer<->lender, unless they offload it but there will then still be cost and ultimately counter-party risk. >> >> Absolutely - hence the oft-repeated statement that the most profitable part of Ford was Ford >> Finance. Quite true, but that is/was essentially all about the USA. And of late the manufacturing has been reporting losses, more than offset by Ford Credit. However this is an arguable picture. The profitability in loan operations is usually provisions based* and the loans business rides on the manufacturing where the big fixed costs are. It's a bit like saying electrical retailers make all their profit from warranties - but if it was that simple they would simply close all the shops and just sell the warranties. >> >> There's a lot of gross profit in a car to spread around between the manufacturer, >> importer and finance company. Dealers get buttons. Up to a point. Dealers have big commission opportunities in finance commissions, especially on deals they originate and on used cars which are very much part of the wider picture of a PCP-driven market. It's a very tangled web. And if new car sales go backwards, which they have been doing, the margin pressure stresses every link of the value chain. *Finance companies are strange animals. The provisioning for losses is usually arrears-based, whereas the income is released as it is amortised. So in a growth market it always looks fantastic - the income release comes ahead of the credit losses, and in that environment arrears are usually low too. When the growth stops or reverses, the income release rate falls immediately, but the timing of the provisions means they peak some time behind peak income. Then the wider picture usually means that arrears increase and provisions go up further. Add to this the residuals risk on leasing and PCPs. The finance companies are highly geared so credit losses and any residuals shortfalls make a disproportionately large ding in profits. Ford Credit has AFAIK been seeing declining residuals performance anyway and the reported profits falling (remembering that this figure can be managed by Ford through transfer pricing anyway so must be viewed cautiously if looked at in isolation). Just my musings of course. I have some relevant experience of credit risk and pricing but I have had no direct involvement in auto-financing for many years. No doubt things have moved on, but there are some seemingly eternal truths. There is a cycle, in which lenders get ever-braver, growth alone increases profits dramatically so is chased ardently, with marginal pricing becoming endemic. Auto-loans are bundled up and securitised just as mortgages were before the banking crisis. Credit decisions are always based on analysis of extant loan performance and on the assumption that future loans with the same applicant profiles will perform in the same way. |
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New Mon 1 Jan 18 14:09
Finance co exposure to PCP - Bobby
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PCP is great for those who change their cars regularly. I bought my 2004 Scenic on PCP as it was a cheaper monthly payment that the six month old equivalent car with a loan. And being newer the PCP car would be worth more in 3 years time. My plan was, up to then, I had been buying 3 year old cars so could buy this and then in 3 years, if I wanted, I could then buy a 3 year old car that I had owned since new and knew the history. As it was, come the third year, the sunroof and dashboard of the car were creaking so badly I was glad to get shot of the car! The PCP figures often look attractive as they have manufacturer contributions to them but, as with anything to do with car buying, you really need to look at all the options. In this case, the price is based on RRP whereas a broker may get you a 10-15% discount on that. |
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New Mon 1 Jan 18 21:50
Finance co exposure to PCP - The Melting Snowman
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>>PCP is great for those who change their cars regularly. A better method therefore is to not change regularly. A lot of people seem to think a car is beyond use at 3 years. My method has generally been to buy decent quality at about 12 to 18 months, do not skimp on maintenance and keep it until the wheels fall off. But cars are rarely just a financial consideration, there is a varying degree of emotion involved, which the more astute salesmen can tune into. |
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New Tue 2 Jan 18 08:54
Finance co exposure to PCP - movilogo
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>> lot of people seem to think a car is beyond use at 3 years May be that perception originated from most makers offering 3-yr warranty as standard? Then the fear of having astronomical expense if things go wrong. I wonder if cars with 5-7 yr warranty have same perception. |
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New Tue 2 Jan 18 09:22
Finance co exposure to PCP - zippy
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>> I wonder if cars with 5-7 yr warranty have same perception. I suppose so because I chose my car partly weighted on a 5 year 100,000 mile warranty as I do over the 25,000 miles a year and a 3 year 60,000 warranty wouldn't cut it. |
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New Tue 2 Jan 18 09:24
Finance co exposure to PCP - commerdriver
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>> lot of people seem to think a car is beyond use at 3 years >> There is certainly a cut off for leasing companies at the 3 or 4 year level, our company cars have a maximum lease of 4 years. Not sure whether that is a reliability thing or an economic thing. Certainly my plan when I retire is to buy at 1-2 years and then run for something between 4-8 years, depends when the need for something different overcomes the financial inertia. I shall miss that new car feeling, still one more time in March/April.. |
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New Tue 2 Jan 18 13:06
Finance co exposure to PCP - movilogo
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>> buy at 1-2 years and then run for something between 4-8 years, I have noticed a trend lately that for many cars it is not easy to find a good priced example of 1-yr old cars! May be because most buyers bought under PCP and they can't give up before 3-yr. Other buyers can't find a 1-yr old example and they'd end up buying a brand new one. So PCP is indirectly creating a void of 1-2 yr old cars in the market - effectively forcing buyers to buy new cars, under PCP!! Once PCP released cars appear at 3-4 year mark, many buyers would skip them because of warranty expiry etc. Last edited by: movilogo on Tue 2 Jan 18 at 13:07
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New Wed 3 Jan 18 10:19
Finance co exposure to PCP - Mapmaker
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>>I shall miss that new car feeling, still one more time in March/April.. Each to his own, but that's a jolly expensive feeling for the minute it takes to get into the driving seat and drive it away. |
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New Wed 3 Jan 18 10:38
Finance co exposure to PCP - DP
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>> Each to his own, but that's a jolly expensive feeling for the minute it takes to get into the >> driving seat and drive it away. It was nice to choose a car that I really wanted, spec it to my exact requirements, have it built, and then drive it out of the showroom. I'm glad I have experienced it, and collection day will stick in my mind as one of the truly memorable experiences I've had in my life. Was it worth the cost? I'm not sure how you would begin to put a monetary value on an emotion and a memory, even if you could agree it had one in the first place, but to me it was, yes. People will blow many thousands of pounds on a fortnight's holiday that serves no practical purpose other than for the experience and the memory (you could get the same rest and downtime in a cottage in the UK for a few hundred). Arguably, this is no different. I'm fortunate in that my employer effectively pays for my car. My net car allowance is about the same as the monthly payment on the car, so all it really costs me is the maintenance, insurance and private fuel, and the MAR makes a good dent in that. Yes, I could have got something cheaper and more sensible, and pocketed some money every month, but I'm glad I didn't. Would I do it again? I'm undecided. It depends on my financial situation and the options on the table at the time when the PCP comes to a close. At the moment, I like the car so much, I am seriously considering paying it off and keeping it if the GFV / balloon is competitive with the market at the time. Too early to speculate though, so I'm just enjoying the car at the moment. Last edited by: DP on Wed 3 Jan 18 at 10:41
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