With inflation spiking to levels unheard of since the dark days of the 1970s, it’s clear that buying a car is about to become less affordable. When the 2008 financial crisis hit, the European Bank floored interest rates, which allowed car makers to offer incredibly tempting finance packages to their customers. These low rates kept a trickle of buyers coming in through dealership doors until the market began to recover.
All through the turmoil of Brexit and the Trump administration, rates remained relatively low, and finance repayments on modest cars remained generally affordable. However, with the rising tide of inflation, one that’s being driven by a war-triggered energy crisis and a background of a looming climate crisis, it looks as if the days of cheap car loans are over. With them gone, the days of cheap cars — full stop — might be over.
For the moment, from an Irish perspective, things aren’t yet looking apocalyptic. Brian McNulty is the commercial director of Mobilize Financial Services Ireland, which used to be called Renault Bank until a recent rebrand. Renault Bank, as was, has been operating in Ireland for more than 10 years, and in that time it has handed out €1.7 billion to Irish car buyers in the form of loans and PCP deals. That’s enough finance for more than 100,000 Renault and Dacia models in that time.
McNulty recognises the challenges of the moment, but says that for now car buyers are weathering the storm. “It is a concern for us, as it is a concern for our customer base who have to manage these increases and the uncertainty that they bring” he told The Irish Times. “However, current demand is still exceeding supply and our finance penetration rate is over running at 60 per cent, which has grown versus last year. All our finance agreements have a fixed interest rate, which brings a sense of security to our customer base knowing that their monthly payments will not fluctuate. In saying that we are monitoring this with our customer base.”
In the US market, there have been troubling signs that late and missed payments for car loans have been rising — albeit they are still at a level lower than they were pre-pandemic — and that repossession of vehicles has been rising compared to 2020. Average monthly payments for car loans in American have recently hit an all-time high of $712, while Ford’s chief financial officer John Lawler told the Deutsche Bank Global Auto Industry Conference that: “We’re looking for every data point we can to get a read on where the consumer is and where they’re headed, given the inflationary issues, economic pressures. We are seeing some headwinds when it comes to delinquencies as maybe a leading indicator.”
So far in Ireland, McNulty says that’s not the case. “In short, no, we haven’t seen this yet” he told The Irish Times. “There are a couple of factors that do help. Number one; our customers have fixed payment plans and number two; residual values are extremely strong in our portfolio which provides our customers with equity.
With a small car, these additional costs can hardly be absorbed. So entry-level mobility with combustion engines will be significantly more expensive
The Covid-19 pandemic was a financially challenging time for a lot of people but others were able to save money during this time. The increase in the cost of living will be consuming potential savings and we are monitoring this closely, but the impact has been limited. In terms of arrears, each customer has a different financial situation and we treat each one on a case-by-case basis. To date we haven’t experienced a spike in arrears so we are able to manage each customer from a resource perspective on an individual basis. I would urge any of our customers to call us if they are experiencing any difficulty.”
Those, of course, are existing customers who have already found the wherewithal to put down a deposit and qualify for finance. For those still looking to make a purchase of a car that’s anything close to affordable, the window of opportunity may well be closing. Spiralling costs for internal combustion engines may force Volkswagen into giving the long-lived Golf model the chop, once the current eighth-generation version has run its course.
That’s the view of VW’s brand chief executive Thomas Schäfer, who told Germany’s Welt newspaper that incoming new exhaust-cleaning technology required by the next round of Euro7 emissions regulations could make the traditional Golf uneconomical to build.
The extra cost of these systems — said to be as much as €5,000 per car — is bad enough, but any new Golf would have an exceptionally short lifespan. With the current model having been introduced in 2019, it won’t be up for replacement until 2026 at the earliest. By then, there will only be four years left to recoup development costs before many European nations start shutting down the sales of internal combustion cars. Essentially, VW is admitting that the death warrant for the small, affordable car has been signed.
“With a small car, these additional costs can hardly be absorbed. So entry-level mobility with combustion engines will be significantly more expensive,” said Schäfer. “Starting prices at €10,000 will no longer exist in the future. Individual mobility is a basic need and must remain achievable in the future. We will have to see whether it is worth developing a new vehicle that does not last the full seven or eight years. It is extremely expensive.”
The death of the Golf would be a significant moment — more than 45-million Golf-badged models have been sold around the world since the first generation was launched in 1974. The Golf’s success saved VW twice — once, in the 1970s when the firm desperately needed something modern to replace the original Beetle, and again in the 1990s when classier Golf models allowed VW to start pushing upmarket and charging more for its cars, which staved off a looming bankruptcy.
Of course, the Golf itself is hardly cheap any more, with the most affordable model currently wearing a €31,000 price tag. The smaller Polo may not get a direct replacement, as it’s exceptionally difficult — at the moment — for car makers to get the profit and loss sums to add up when it comes to making electric small cars. VW has already announced plans for a compact ID. 2, which will sell for about €25,000 in Germany, and have an electric range of around 350-400km. “That’s the psychological sell point at the moment” says Schäfer.
Schäfer was quoted in the German media recently as saying that those who would have bought a more affordable Golf model in the past may well now be better off shopping in the secondhand market, remarks that caused no little outrage among some.
VW isn’t alone in aiming to give smaller, more affordable models the chop, though. Ford has confirmed that there won’t be a next-generation Focus or Fiesta, while Mercedes has said that it will be trimming the line-ups of its compact, front-wheel drive cars, based on the A-Class, in favour of greater investments for high-end models. That’s where the profit margins are right now. “We are not chasing volume,” Mercedes chief financial officer Harald Wilhelm said on a call with reporters.
Forget ownership altogether and just grab an instant-rental car off the street as and when you need it?
Even if you can stump up the necessary for a deposit on a new car, and afford the monthly repayments, it may well be that you will be denied a loan on the basis of the car you want. Bank Australia has this week announced that, from 2025, it will no longer offer car loans for vehicles with combustion engines.
Only electric car loans will be approved. “Our announcement today is the beginning of a conversation with our customers and a signal to the wider market that if you’re considering buying a new car you should think seriously about an electric vehicle, both for its impact on the climate and for its lifetime cost savings,” said Sasha Courville, Bank Australia’s chief impact officer. The bank says that it will continue to offer loans for used combustion-engined vehicles.
Is this all a blip? Is this all a muddle driven by an aggressive war, which has triggered an energy crisis against a backdrop of a climate emergency? In a few years will this all have calmed down and we will be back to some sort of business as usual? Or is this the death of the small, affordable car, and the end of cheap credit?
“It is too difficult to predict” says Mobilize’s McNulty. “The war in Ukraine created a lot of uncertainty in the finance markets and interest rates have been impacted. Mobilize Financial Services is central to the Renault Group’s strategy and it helps us focus even more on developing products that support usage, flexibility and affordability. In recent months we have demonstrated our ability to reduce these barriers and we will continue to adapt during these challenging times.”
Of course, Mobilize is in a relatively good position as it provides loans for Dacias, arguably the only brand that remains committed to providing genuinely affordable vehicles (even Skoda has moved into the higher-priced sphere at this stage). Beyond that, Mobilize wants to turn buyers, some of them anyway, into subscribers. “Our objective is providing customers with an offering linked to usage, for most customers their car sits outside their front door for the vast majority of time” McNulty told The Irish Times. “There are huge efficiencies to be made for the environment with a pay per usage payment model. In the coming months and years, we’ll provide more products and services that support this strategy. In terms of duration the customer will ultimately decide but we believe that a car will have more users over a longer period of time.”
Mobilize will, next year, launch a two-seat electric city car called the Duo, which can be rented for short drives from on-street locations. Beyond that, it wants to branch out into e-scooters and charging solutions too, with plans for 200 rapid electric car charging hubs across Europe.
Maybe then that’s the solution for low-cost car buyers. Forget ownership altogether and just grab an instant-rental car off the street as and when you need it? It may seem a tempting solution, but it will require an enormous sea-change in how millions of people view car usage and ownership to get us there.