Major independent finance houses are launching new products to help car loan customers out of negative equity. The move marks the first significant new finance product activity since the launch of personal contract purchase plans (PCPs) more than 10 years ago.
Lenders hope to restore credit for customers who are in financial difficulty and also stem the rising tide of so-called voluntary terminations – customers who hand their car back because they owe more to the finance company than it is worth.
The industry believes the problem of negative equity in cars could be more significant than the similar housing crisis of the early Nineties. They say it has been caused by a combination of the rapidly falling value of used vehicles and dealers encouraging unsuitable customers into four- or five-year finance deals when the majority of people change their cars within three years.
Phil Pedley, Capital Bank Motor director, said: “There has been a devastating combination of falling values and longer-term hire purchase deals. In the past, if people couldn't afford a car, they went for a cheaper model – now they are being encouraged to extend the loan terms.
“Halfway through a 60-month deal, they may find they owe the finance house £10,000 on a car which is worth £7,000. The fall in new car prices has hit everybody who owns a car by hitting their asset value.”
Capital Bank Motor has launched Added Values after a six-month trial. The product is based on a three-year PCP but with an additional three-year personal loan built in. The loan pays off the negative equity on the old car while the PCP funds the new one.
Mr Pedley said: “We want to ensure payments are competitive, the term is more in line with a natural change cycle and the customer can get into another vehicle at the end of the agreement.”
GE Capital Woodchester has taken a slightly different approach with Loan Plus, launched in February. The product uses a hire purchase agreement to fund the new car with a personal loan for the negative equity.
Neil Clyne, GE Capital Woodchester sales director, said the decision to use hire purchase was dictated by the size of the advance required and to give customers greater protection under the Consumer Credit Act. The company has PCP plans available if customers require them.
GE Capital Woodchester is finding around 30% of its business with major dealer groups is now on Loan Plus while smaller dealers are using the product for around 10% of customers.
Mr Clyne said: “The problem of affordability has driven people into longer term agreements. Some direct lenders will loan money for cars over six or seven years and there is also the problem of customers who have added their car loans into flexible mortgage arrangements.”