P2P car loans for subprime borrowers

A nurse standing in front of a car ©

An alternative finance platform, Buy2Let Cars, claims investors can get a bumper return from leasing cars to people with less-than-perfect credit histories. 

Car loans are big business. In 2016, says Jim Edwards on Business Insider, UK consumers owed £58bn on car finance – 30% of all consumer debt – and 80% of new cars are sold with a form of leasing called personal contract plans, or PCPs. All the finance for that comes from banks or the carmakers themselves, but adventurous investors can now get a slice of the action via alternative lending.

Buy2Let Cars is the brainchild of Reginald Larry-Cole, a former car salesman who, as well as wanting to make money for himself and his investors, is on a crusade to bring affordable motoring to “everyday workaday people” – people who can’t get a lease deal through traditional means. Not people working 16 hours a week at the local takeaway with their income topped up by tax credits, says Larry-Cole. “Responsible people” – think nurses, teachers and police officers – “who have found themselves in a situation where credit is poor but they still have disposable income.”

The principle is simple. As an investor, you stump up the money for a car. Buy2LetCars buys the car, negotiating a healthy volume discount from the manufacturer. The car is leased to a customer who pays you an agreed monthly figure for three years. At the end of the three years the car is handed back and sold on the second-hand market. Larry-Cole has this covered with a separate venture, PayGoCars. This way, he says, you’re getting the retail price for the car, not the wholesale price you might get if it was sold at auction. The investor reaps the rewards: a £7,000 investment will get you a 7% return; £14,000 gets you 9%, £28,000 gets you 11%.

The market is weakening

Very high returns imply very high risk. Buy2LetCars has a default rate of around 3% on lease payments, says Larry-Cole. But he insists that, since 2012, none of his investors has lost any money – indeed, everyone has received the return they were expecting. All customers go through a credit check, and cars are fitted with starter interrupts and trackers. If a customer is late with a payment, they are given a series of automated warnings. If they don’t pay up, the car won’t start. And if the car is stolen, the tracker lets Buy2LetCars know where it is.

The business has matured and been tested at every step from acquisition to disposal, says Larry-Cole. Buy2LetCars has bought and sold more than 2,000 cars since it began, and has a fleet of 1,200-1,300 at any one time. The investor has a charge over the car so if the company goes bust investors carry on being paid the monthly payment and the money from disposal at the end of the lease. The fact you’re buying into a depreciating asset is irrelevant, according to Larry-Cole. The customer has a contract to pay you the stipulated sum. And the discount he can secure from manufacturers is such that he’s not worried about resale values.

Yet the outlook is deteriorating. The car finance sector is facing “exactly the same problems” as the mortgage market before the financial crisis, according to Morgan Stanley. And the latest figures from the Society of Motor Manufacturers and Traders (SMMT) suggest the new-car market is sagging. The yield may look enticing, but to us this scheme is scarily reminiscent of the peak of the subprime lending boom.


Funding Circle’s IPO flop

Share trading app Freetrade launched its no-fee service to customers last week after three years in development. The smartphone app, which has a waiting list of more than 60,000 people, will offer investors UK stocks and ETFs. Users of its basic service will pay nothing; trades will be bundled up and executed at the end of the day. It  plans to introduce a premium service for a monthly fee whereby trades are executed instantly. Rather than passing trades through an established broker, Freetrade has gained its own authorisation as a stockbroker and joined the London Stock Exchange, building a “full stack” brokerage from scratch to execute its own trades. It hopes to emulate US share trading app Robinhood, which launched in 2013 and is now valued at $5.6bn.

German digital bank N26 will become the latest entrant to the UK’s challenger bank scene, when it opens its current account next month, says Harry Wilson in The Times. The smartphone-based bank will join the likes of Monzo, Revolut and Starling in offering the standard digital fare – an app that lets you know instantly what you’ve spent, with fee-free foreign currency transactions and all the usual bells and whistles. You can choose your own PIN, temporarily lock your card if you misplace it, set savings goals and reach customer services via in-app chat messages. Berlin-based N26 has been active in Europe since 2015 and boasts 1.5 million customers across 17 countries.

Peer-to-peer lending platform Funding Circle floated on the London Stock Exchange last week and has since seen its share price slide by more than 20%. By last Wednesday it was trading at 339p, 22% down on the opening price of 440p. At one point the price fell as low as 327p – a 25% loss. Funding Circle was launched in 2010 and has made more than £5bn in loans to small and medium-sized business, mainly in the UK, but also in the US and Germany. It has yet to make a profit.

BillButler is a smartphone app that aims to help you keep on top of household utility bills. Users add details of energy, water, TV and broadband accounts, among others, and can keep track of how much they’re spending, pay them directly via the app, and split them between members of the household – handy for people who share the bills. The app will also alert you if you can get a better deal elsewhere. It hopes to add home insurance and services such as Netflix by the end of the year.