schroders.com/en/uk/the-value-perspective/blog/all-blogs/consumer-credit-growth/
“The vast majority of consumer credit is different, however because it relates to car finance, which is backed by an asset and …” Nooo – as we argued ourselves in Crash course, borrowing is a very bad idea when it is done against a depreciating asset … such as a car.
“One obvious issue here is not only are these finance providers seemingly happy to lend to people who cannot afford it, they are seemingly happy to do so using a depreciating asset as security,” we wrote. “At least with a house, a lender could – on a long-term view – reasonably assume its price would rise. In the sub-prime crisis, of course, prices fell but it was still a better bet than with an asset that always depreciates.”
As it happens, the Bank of England has itself written an article on Car finance, which examines how new car purchases these days are mostly financed by manufacturers’ own finance houses. It argues this risks exacerbating the cyclicality of new car sales and, moreover, “manufacturers increasingly bear the risk of future falls in car prices, potentially making the industry even more vulnerable to macroeconomic shocks”.
One of the big issues with car financing is the reliance the whole system places on the value of second-hand cars. As soon as this value drops, it means somebody is missing out and – whether that is the car-financing company or the person who has purchased the car – that means there is a serious level of fragility built into the system.
No comments:
Post a Comment