Experts Warn That Falling Used Car Prices Could Lead To PCP Crisis

With a downturn in the market, experts are warning that Lloyds could find itself in serious financial trouble. Lloyds are one of many banks that have been providing millions of pounds worth of car finance loans to drivers across the United Kingdom. Its motor finance division has partnerships with Jaguar Land Rover and Lex Autolease to offer drivers financial help when it comes to buying a new vehicle. However, analysts at JP Morgan are warning that the lender could be leaving itself dangerously exposed if there is a dramatic shift in the market.

Lloyds have provided so many car finance loans that if their losses increase by merely 1% more than calculated it could hit the lender incredibly hard. Their annual profits would suffer a mighty 2% loss overall next year. In real figures, this would equate to a hit of approximately £85 million. All it would take for this to occur is, for example, a drop in prices facilitated by more used cars hitting the second-hand market.

The most risky car loan that Lloyds and other lenders have begun to undertake is PCPs, short for personal contract purchases. This is where drivers make monthly repayments for a set period of time, meanwhile owning a brand new car, before returning the vehicle at the end of the agreed period.

Schemes like this have led to record car sales over the last few years by helping young people, self-employed drivers and part-time workers easily get behind the wheel of a vehicle. However, the success of PCPs relies on used car prices increasing as most firms eventually make their money by selling the vehicles second-hand afterwards. If the average price of used cars drop, firms could land in millions of pounds of debt.

Personal contract purchases are a huge risk for lenders such as Lloyds. However, this has not prevented the majority of firms from getting involved. Alongside Lloyds, NatWest are one of the main providers of PCPs with a recently launched tie-up with ALD Automotive. Their scheme allows drivers to purchase cars via a NatWest loan.

Lloyds does not appear to be immediately worried by the warning. A spokesperson for the bank said that it ‘conducts regular stress tests to assess the impact of potential future market reductions in car valuations’. They told the Daily Mail that they are ‘comfortable with [their] exposures based on these’ and stressed that it is a responsible lender.

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