Car finance providers have been inundated with calls from motorists seeking relief on auto loans during the coronavirus lockdown, raising concerns about a wave of defaults across the sector.
Calls to lenders have spiked to 20-30 times the typical level, according to the Finance and Leasing Association, the industry body for automotive finance providers.
“There has been a very significant percentage increase in call volumes going into member companies,” said Adrian Dally, head of motor finance at the FLA. “This is causing very significant operational pressures.”
Lenders that offer motor, consumer or equipment loans experienced a 1,400 per cent lift in the number of calls from concerned customers in the first week of lockdown. Volumes increased by 200 per cent again the following week, and held constant in the third week, according to the FLA.
The calls are prompting fears that large numbers of car owners cannot afford the loan repayments on their vehicles, potentially leaving the banks that financed the sales exposed to rising defaults.
The Financial Conduct Authority is expected to release guidance on automotive loan relief as early as Friday, though any measures are expected to be heavily means-tested.
Black Horse, one of the UK’s largest motor finance companies, which is owned by Lloyds Banking Group, said it had already given more than 60,000 payment holidays.
More than 80 per cent of new car sales are paid for using personal contract finance or PCP, according to the Society of Motor Manufacturers and Traders. This is a form of leasing where the driver rarely takes actual ownership of the vehicle but finances its depreciation in the initial years before trading it in for another car.
At the end of the contract, motorists either pay off the remainder of the car, hand back the keys, or most commonly, switch into a new contract, using any value left in their current vehicle as a deposit.
The PCP model, often handled by the financing arms of the car manufacturers, lowers monthly payments for consumers and helps shift large volumes of new cars.
However, it has been criticised for its dependence on rising used car prices, which could be at risk if more owners suddenly decided to turn in their keys.
Motor finance companies have the ability to negotiate flexible payment plans, forbearance or even the termination of loans.
“There are a lot of people driving around in premium cars they should not be able to afford,” said the head of one large dealership group. “There will be a lot of delinquencies in PCP and PCH [personal contract hire], though we have not seen any yet.”
The car sales industry is frozen during the lockdown, with showrooms shuttered and call centre staff working from home. Some lenders are unable to pick up cars from customers who cancel their contracts.
The FCA is expected to force firms to offer payment holidays similar to those being given to mortgage and credit card borrowers. However, industry experts said the task would be more complicated for motor finance because companies would need to work out individual solutions for each distressed customer.
“Auto lenders traditionally have well entrenched and mature processes for dealing with customers in financial distress,” said Nathan Thompson, automotive director at Deloitte. However, he added that a challenge would be meeting the increased customer demand.
“For many PCP customers affected by this, trading will be postponed not cancelled,” said Mr Dally. “There is virtually no car buying or selling going on so the best way to bridge this crisis is to keep customers in cars.”