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Tuesday, 4 July 2017

Car lease bubble to burst?

It's the same all over Europe. No-one buys a car for cash any more. The roads are full of cars under five years old most of which seem to have been bought on retail leases, those three or five year deals with low or no deposit, low monthly lease cost but with punitive damage and mileage conditions and a vastly inflated bubble payment at the end of the term should drivers perversely want to buy their cars rather than take out a new lease. 

Here they all go for those vast-tyred monsters that come as close to looking like like a Humvee as road-legal cars can get. With thick chrome roll bars and Bengal plate slab decks. And they pretend they own them. 

What I can't understand is what the car makers' leasing companies, who presumably own all the three year old returned cars, actually do with them. If they released them all on the market then second hand prices would plummet with a tsunami of perfect condition pre-owned cars and fewer people would take the new lease options - so where are they? Shipped overseas? In some vast desert store like the entire 1970s USAF fleet of aircraft? I think we should be told.

For scale, the driver is standing under the front spoiler. Essential for the Munich school run.


Poisonedchalice said...

Actually it isn't the same all over Europe. The UK, compared to everywhere else in the world apart from the USA, has some of the most innovative financial solutions to buying anything - cars included.

Personal and business car leasing is a very finely tuned financial instrument; get it wrong and the finance company loses big time. It starts with being able to "buy at the right price". Lease companies don't pay anything like what the public pays; they generally get 35% or more of list price. Then the lease costs are based around the lease price - see where I'm going here? Then the lease company reclaims all the 20% VAT but you the buyer pays VAT on the lease payments.

The finely tuned part is the calculation of condition and mileage, which is tightly controlled. For low mileage users, this can be a great method of obtaining shiny new metal every 3 years. No MOT, no servicing, no warranty worries. Just add fuel and drive!

Finally, there are outlets for all these cars back into the retail market (think about all those huge car supermarket places) where the unsuspecting punter thinks he is getting a fab deal because he is basing his mentally calculated discount on what he considers to be the original retail price when new.

Its been working like this for years!

Sadly, though, it doesn't work for me because I do 20,000 to 25,000 miles per year.

Poisonedchalice said...

I meant the lease cost is based around the retail price...

Prawn Sandwich said...

I see more clearly now. At some point the bubble will be pricked? Perhaps caused by a recession or interest rate rise. At the beginning of the 2000's car buyers used home equity to buy fancy wheels. This leasing wheeze sustains the keeping ahead of the Jones,s in the vehicle stakes alive and well

wiggiatlarge said...

Many of the manufacturers like VW have their own financial arm that faciltates this so they are very much "on the ball" re pricing, or are they?
I was given all the guff by a salesman at a VW dealer whilst waiting for my car to be serviced, after listening to how wonderful these deals are as you never have to part with any large amounts of cash and all is fine, I asked the obvious question, if it sounds to good to be true what is the catch, he swears there is none but his face said otherwise.
It fits in perfectly with the modern mindset, have it all now, never any need to save for anything including housing, what could possibly go wrong rewind to 1990.

English Pensioner said...

I've been looking at new cars in various showrooms, and the salesmen all seemed to show more interest in how I would pay for the car rather than the type of car I wanted. I remained non-committal (I will pay cash) and all were trying to push me towards a bigger car than I have at the moment when in fact I'm looking for something smaller and at my age comfort and ease of access are my main concerns.

Demetrius said...

This bubble is big and nasty.

Domo said...

Its a bad way to buy a car, but not that bad.

People used to go to the bank
Get a £10,000 loan
Buy a car
Drive it for three years
Pay off the loan
Drive back to the dealer, sell the car for £3,000, borrow another £10,000 and buy a £13,000 car.

Now they only borrow £7k, allowing more people to buy new cars
But at the end of the three years, they have nothing.

The cars end up where they always did, used car lots.

Its a cheap way to rent a car, but you end up running to stand still even on a good deal.

Raedwald said...

PoisonedChalice - thanks for a succinct and complete explanation. Now I understand!

Rossa said...

I used to work for a vehicle leasing firm. Poisoned Chalice is correct. All fleet customers be they leasing companies, hire car companies, corporations offering company car to their employees etc., get up to 40% off RRP. The retail customer very rarely gets more than 5%.

Often, like the supermarkets do, the price will be inflated and then dropped in a 'sale'. Those ads where they offer a minimum trade in figure are rigged too as the difference is built in to the cost of the new car. really thought they'd give you a grand for that old banger!

The manufacturers also give their dealers special 'deals' to shift old stock, usually at month, quarter and financial year end. They can't afford to stop their production lines but that means inventory piling up in compounds (ever seen those photos of new cars in fields or on old runways at airports). Often your 'new' car is nothing of the sort. It may be up to two years old! It just hasn't been registered yet. Within the lifespan of a model there will be several 'facelifts' which can show which is the current model though they are usually so minor that it is hard to spot a new new car from an 'older' variant.

Almost all the financing is done through subsidiaries of the banks. We used Network leasing which was part of Barclays then got sold to ABN Amro. While the software gave us the payment terms it still had to go to underwriting for approval. As PC says, it is very finely tuned. Any 'loss' is offset against bank profits to reduce their tax payments.

At the back end of a lease, often these cars will go to auction. Just take a look at the throughput in places like BCA. Premium cars like Merc and BMW have their own channels to shift cars into their secondhand dealers. I've been buying the bigger engined (current one a 3 litre petrol) 5 series for the last 15 years as no one wants them. They get supplied on a business lease where cost isn't an issue to the driver, then usually go into a premium channel as a used car. I get them after the second owner when they are usually a quarter of the original cost. You can get an awful lot of car for your money this way. Ok, fuel economy ain't brilliant but I've had petrol cars with 180k miles on them still running well at 15 years old. A good specialist mechanic looks after them for me and for me they are a very comfortable luxury form of transport but also very cheap motoring.

Current personal leasing scam is the scariest yet. Selling brand new cars with no deposit to youngsters even students or unemployed! They include a year's insurance too as often that excludes the under 25s. That is a bubble that's just waiting to be burst.

Rossa said...

Should have also mentioned Uber and Lyft. They are persuading drivers in the US (don't know if this is in the UK too) to take on a new car on a lease through Uber/Lyft where the lease payments are deducted from the payment to the driver. A complete con trick. The driver never owns the car and if they give up driving have nothing to show for it. A bad month can see them take home next to nothing in income after the deductions at source.

This is the latest version of a scam that's been uncovered in the haulage industry in America. Owner operators have been persuaded by the distribution companies to use their trucks as a 'deposit' for a new truck on a lease deal. This has led to drivers being bullied into working longer than the legal maximum hours and all sorts of other practices (such as charging to park your truck in the yard!) under threat of losing their livelihoods. If the driver is off sick or for any other reason they can find themselves fired and financially screwed. All the court cases so far have found in the drivers' favour but it hasn't stop it from happening. The retailers like Walmart want to drive down costs, to increase their margins, which ripples through the distribution chain and it's the drivers that end up taking the hit.

Budgie said...

There's another financial disaster waiting to happen. ECB chief Draghi stated a few days ago that the eurozone is moving from a deflationary to a reflationary phase. What's more, given the subsequent yield increases (see below), he was believed. That is noteworthy of itself. This will probably apply to the UK, and the developed world as well, by the way.

Up to now ECB QE has been used to buy sovereign debt. That is, the conjured out of thin air QE has been fed to dodgy EZ economies like Greece, Italy, etc, to keep them afloat. But the ECB will have to curtail its QE if inflation begins to take hold, otherwise inflation will rocket.

The indebted EZ countries (and the UK) will still have to sell their sovereign debt, unless we start living within our means. But without the benefit of the central banks' QE largesse they will find it a lot harder to do. Hence the sovereign debt prices will diminish and the yield will increase. In fact sovereign debt yields went up over a range of 5% (USA), to 77% (Germany), in a matter of days after Draghi spoke.

If this happens slowly we may manage. The UK is better off than most of southern Europe. But Corbyn has come along demanding even more spending (and that means even more borrowing whatever he says about getting the money from "the rich"). This is of course yet another reason to get out of the EU quickly (within 12 months), so that we aren't dealing with a sovereign debt crisis whilst "negotiating" with the EU.

G. Tingey said...

Some of us are driving older vehicles, that we have no intention of ever changing
[ As in 1996 Long-Wheelbase Land-Rover with no electronics .... ]

Thud said...

Lease on wifes car up this month and we have an option to buy at 15250, offered 18350 for it by a well known online site we have used for me.

Anonymous said...

I've always driven old cars. A neighbour recently got an insurance payout of £12k+ after he'd had his Merc nicked. I reckoned that this was about as much as I've spent on cars in the last 10+ years. But then, I'm "mechanically literate".

Morounfiyinfoluwa said...

Good article in the FT on PCP from March

Michael said...

"Shall I compare thee to a summer’s day?
Thou art more lovely and more temperate:
Rough winds do shake the darling buds of May,
And summer’s lease hath all too short a date:
Sometime too hot the eye of heaven shines,
And often is his gold complexion dimm’d;
And every fair from fair sometime declines,
By chance, or nature’s changing course, untrimm’d:
But thy eternal summer shall not fade,
Nor lose possession of that fair thou ow’st;
Nor shall Death brag thou wander’st in his shade,
When in eternal lines to time thou grow’st:
So long as men can breathe, or eyes can see,
So long lives this, and this gives life to thee."

I'm approaching seventy pretty damn quickly, so my calcs are based around how many years do I have in a seven year old Golf, while I do about 3,000 miles a year...

You have some pretty good posts here, Raedwald, I'm fascinated by the intricacies of such deals, but as you know, I was once only a humble bloke in building, so these deals usually went 'whooosh' over my head, while I'd return to my Vauxhall and carry on working up my measuring...

Domo said...

PCPs are a great way to get a new car every 3 years.
A gunshot wound to the head is a great way to commit suicide.

Its a different question to ask "is it a good idea to buy a new car every 3 years".

I recently relented and bought a "nearly new" car. But with a traditional bank loan, it wont be replaced in 3 years....