How P2P can help avert a global car crash
Up the road, a speed bump approaches for the world’s largest economies.
In 2016, UK consumers borrowed a record £31.6bn to buy cars, up 12% on 2015. In the US, a similar trend, with auto debt totaling $1.16 trillion, about 9% of household debt. Alarmingly, delinquencies are on the rise too, especially in the US. Analysts are concerned that a new ‘subprime’ crisis could be looming, with defaults on auto loans set to increase if interest rates climb. That happened this week.
The increase in the volume of auto loans is due to the ease of access to financing. In 2016, 82% of UK car finance deals were Personal Contract Purchase (PCP). These plans are often linked to central bank rates, not always reliant on stringent credit checks, including the option to buy the car for a balloon payment at the end of the term and can be securitised. Given the terms and the often-lower credit quality of the borrower, it is these loans that are at most risk of a ‘sub-prime’ meltdown.
The knock-on effects could be significant. The USA and China are heavily reliant on auto manufacturing for revenue and employment. High defaults will mean substantial problems for car manufacturers. Potentially, this could be a considerable problem for the global economy. So what is the solution?
A timely solution to keep the world’s auto industry on the road could be peer-to-peer lending. As we saw after the 2007/08 crisis, crowdfunding and P2P stepped in to fund business after banks closed their doors. P2P could offer a similar solution to the auto industry, providing liquidity for consumers to purchase or re-finance.
P2P is already heavily involved in the world of auto financing. ZOPA and Lending Club offer loans for auto purchases. RateSetter recently announced that they had lent £250m in car loans. So the foundations are in place for growth and adoption.
With increased regulation in the P2P space, heavier credit checks are being placed on borrowers. This will mean lower defaults and lower interest rates. Importantly, it seems general practice in P2P not to use a repayment method that involves a gross residual value i.e. a final balloon payment, and there is little securitization. Cash loans are rarely re-packaged and sold. Hence, defaults are mostly confined to the borrower and the financing crowd. This means there is a lower risk of contagion.
As yet, we don’t have enough data to begin to extensively compare P2P and PCP. Data from sources including Crowdsurfer Pro intimates that interest rates offered by P2P lenders and auto lenders are similar. For example, Zopa offers an IR of 3.6% on a 2 to 5-year loan of £5,000-£7,499, whilst Hitachi offers 3.4% and Ikano Bank 3.7%. So the difference in terms is minimal between P2P lenders and traditional auto finance houses. But the positives discussed around the mechanics of P2P when compared to PCP make it look like an increasingly favourable alternative.
Only time will tell how damaging an auto finance crash might be. But P2P seems ready to offer a solution if it resists the temptation to move towards securitisation. What the entire industry needs – from lenders to borrowers to car manufacturers – is data and transparency. This will give all parties a clearer view of the road ahead.