A car finance lending binge by Lloyds has left it dangerously exposed to a downturn in the market, experts warn.
Britain’s banks collectively have £24billion of exposure to motor loans, and Lloyds has been the most enthusiastic adopter.
The lender – a major player through its Black Horse motor finance division and tie-ups with Jaguar Land Rover and Lex Autolease – has close to £12billion of loans on its books, according to analysts at JP Morgan.
Experts at UBS estimate that if losses on car loans rise 1pc more than expected, it could hit Lloyds’ annual profits by 2 per cent in 2018. For 2016 profits, a 2 per cent hit would have wiped off £84.6million. It comes as thousands of used cars are dumped on the market, driving down prices and putting a credit-fuelled spending spree at risk.
Experts are particularly concerned about controversial personal contract purchases (PCPs), where a driver hands over a deposit and makes monthly payments before returning the car after a set period of time.
Cheap deals led to record sales of new cars earlier this year, but September saw a 9.3 per cent fall in registrations and analysts now fear prices could crash due to a sudden glut of vehicles, with disastrous consequences for lenders.
The finance firms behind PCPs rely on rising used car prices, as they make their money by selling returned vehicles on the second-hand market. If used prices suddenly fall sharply, these companies – including Lloyds – could face massive losses.
The average car lasts eight-and-a-half years before it is scrapped, but PCPs have made upgrading so cheap most drivers get a new one every three to four years.
It means more second-hand cars are also available. Used car registrations rose 10.3 per cent between 2014 and 2016, according to research firm DBRS.
And a study by accountant UHY Hacker Young shows car dealers are sitting on £27.3billion of unsold vehicles across the UK as a glut builds up.
Around 17.7 per cent of dealers’ annual turnover is waiting unloved on forecourts, up from 16.9 per cent a year ago. DBRS said the growth in vehicles for sale is starting to hit prices by forcing sellers to compete ferociously for business.
This means that PCP providers are unable to sell returned cars for as much as they had hoped.
However, banks and car manufacturers are still piling into the PCP market. NatWest has launched a tie-up with ALD Automotive, owned by French bank Societe Generale. The scheme allows depositors to browse used cars online and then see how much it would cost to buy one using a PCP from ALD or a NatWest loan.
The Mail has warned of how salesmen were offering cars without asking for a deposit.
An undercover investigation revealed that a salesman showed a 24-year-old how to write a credit check form to ensure he was approved, and another tried to sell a £15,000 Audi to a young man who said he was out of work.
A Lloyds spokesman said the bank conducts ‘regular stress tests to assess the impact of potential future market reductions in car valuations and is comfortable with our exposures based on these’. The company is a responsible lender, he said.
Originally posted on DailyMail