Luxury car VTs causing lenders pain

Voluntary terminations (VTs) on hire
purchase (HP) agreements have been in use since at least 1895.
Their original intention was to help people who were experiencing
financial difficulty and unable to meet the rest of their credit
commitments. More than 100 years on, the motor finance industry is
experiencing some of the effects that our altruistic forefathers
could not possibly have foreseen. Indeed, the motor industry had
only started nine years earlier in 1886, when Karl Benz invented
the first gasoline-powered vehicle.

But now the company Mr Benz co-founded, as well as the rest of
the luxury car market, has found itself severely disadvantaged by
changes introduced to the Consumer Credit Act in April of this
year. The 2006 Act removed the £25,000 limit for regulated credit
agreements. This means that the majority of HP agreements are now
regulated and subject to the VT provisions. These allow a customer
to terminate their credit agreement at any point and only be liable
for half the total amount outstanding.

Luxury sector feeling the pain

The impact on the luxury car market has been immediate. Finance
& Leasing Association (FLA) members are seeing increasing
numbers of customers using the VT provisions. The vast majority of
these customers are not in financial hardship and thus contradicts
the original intention of the provisions. As a result, FLA motor
finance members are left with significant bad debt.
Research showed that the cost of VTs to members in 2003 was £83m,
and since the regulatory changes in April losses are set to
increase further. One FLA member reported record losses from VTs in
June, and this is unlikely to be an isolated example. To manage the
potential losses, lenders are changing the type of agreements they
underwrite and may require higher deposits from consumers.

The FLA has written to Gareth Thomas, consumer affairs minister
at the Department for Business, Enterprise and Regulatory Reform.
We are urging the government to look again at how the VT provisions
are being used. The FLA is not advocating a reduction to the
protection afforded to consumers in financial difficulty, but
measures to mitigate the disproportionate cost of VTs to our
members.

The government argues that VTs are a moral hazard – as it
requires lenders to finance goods only over their economic life and
therefore to lend against durable goods. It also argues that there
are no calls for reform from other sectors where goods are financed
on HP, for example, ‘white goods’. This argument is spurious, not
least because of the cost differentials. Potential losses on a
fridge are much lower than on a car. If cars are returned after
only half the payments have been made, they are worth considerably
less because the greatest depreciation occurs in the early years of
the car’s economic life.

The FLA will continue its discussions with the government on the
future of VTs and their negative impact during what is already a
challenging and unpredictable time.

---

Comment provided by the Finance and Leasing
Association