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Used cars: Credit crunch

The UK has the highest proportion of debt related to personal income in the developed world, reaching 164% in 2006 – in other words, as a nation, we are in the red.

By the end of August 2007, personal debt reached £1,363bn, equivalent to almost £23,000 for each person in the country. It is increasing by £1 million every four minutes and around 5% each year, according to figures compiled by Credit Action.

With car sales often dependent on finance agreements, several industry experts have raised the suggestion of a credit crunch and subsequent decline in sales. But while they predict some form of crash next year, others are far from convinced.

Miles Roberts, managing director of Southern Finance, believes the used car market will start to see the effects of the credit crunch within a year.

“There are a lot of consumers with fixed rate mortgages,” he says. “When they come to pay these back, the rates can go up, some by as much as £150 per month, and that makes a big impact. It’s the cost of loan repayments on a car. Plus it’s not unusual to see consumers with £15,000 of credit card debt.

“This has to be repaid, and will have a knock on effect when people consider their mortgage over their car.”

Despite concerns, the effects so far have been limited but the market is showing signs of a downturn. Used sales for the first quarter are down 2.5%, 101,000 units. But, residual values are holding up and even new car registrations for September are doing well, up 2% year-on- year, buoyed by growth in the retail market. But the potential for future problems is there, and the industry is cautious.

“We have seen a weakening of retailer demand during the last couple of weeks,” says Lewis Arthur, managing director of remarketing company VRS. “This is due to a combination of higher interest rates and the recent Northern Rock crisis negatively impacting consumer confidence.

“A potential tightening of retailer funding together with weakening consumer confidence could shift retailer activity towards a buy to order approach, increasing stock holding upstream.”

But Rob Barr, communications director at Manheim, isn’t convinced that dealers will be so quick to offload their stock.

#AM_ART_SPLIT# “Used cars are integral to profit as dealers’ margins are squeezed. If you market them correctly then people will buy them,” he says.

“Retail market demand influences wholesale demand. But we’re not seeing a crisis on the forecourt; markets are always quiet during the pre-holiday season.”

However, it is still early days, and some believe the full extent of the problem has yet to be seen. Recent events, such as the crisis at Northern Rock, knocked consumer confidence, and an increased focus on their personal finance could impact on used car sales in the future.

It’s already having an effect on the way people buy cars.

“People are looking at the price every time, and not saying they want extras,” says David Lowes, group general manager and centre principal at Hodgson Toyota in Newcastle.

“They want the car, at the best price, because they need one. We’ve seen a 40% reduction in footfall over the last 12 months, and nearly half over the last six, but we are seeing an improvement now.”

Consumer debt has been met with a considerable increase in individual insolvencies in recent years. Driven by a legislation which reduced the financial penalties of bankruptcy, the number of insolvencies climbed 4.2% year-on-year in the second quarter according to Credit Action, representing a growing portion of the population with a poor credit rating.

BCA communications director Tony Gannon believes this could begin to affect the used car market as people become unable to get loans.

“While there have been some rate movements in recent months, money is still relatively cheap to borrow,” he says. “If money was to remain in short supply for an extended period of time, there could be a scenario where the used car market could be affected if large numbers of potential buyers found finance difficult to raise.

“There will be little affect for the cash rich buyer of course, which means the higher value, prestige, performance and sports sectors are unlikely to be affected by any credit crunch.”

Research carried out by Nationwide Building Society has shown an increase in consumer confidence for September, although it acknowledges that this will not show the full extent of the Northern Rock crisis.

But Adrian Rushmore, managing editor of EurotaxGlass’s, retains a positive note. “The used car market is healthy at the moment, with no prospect of changing,” he says. “In auctions supply is not excessive, demand is high and prices are holding. The situation looks good.”

#AM_ART_SPLIT# Work in progress: UK’s debt problem

With personal insolvencies, debt and interest rates on the rise, the potential for the credit crunch to impact on car sales is looming. But what has caused Britain to become so debt-laden?

According to Credit Action, average household debt in the UK is £56,309, including mortgages. An estimated two million fixed rate mortgages, around one in six in the UK, will expire next year, costing at least £100 per month extra in repayments. Meanwhile, interest rates reached a six-year high in July, the fifth rise in 12 months.

For consumers, this means pressure on finances. More than 2.1 million are permanently overdrawn, and almost half of the UK’s credit card holders don’t repay their monthly bills in full.

Each day, 77 houses are repossessed and 317 people become insolvent. Rob Barr, communications director at Manheim, says the effects may be more obvious on the new car market, but the pressures should not be ignored.

“The pressure not to spend drives customers towards almost new vehicles,” he says. “The used car market is substitutional for a more expensive purchase. There’s been no affect in June or July this year. It’s a stable market on the forecourt, but there’s still time to go.”

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