LOANS UP AGAINST CLASSICS

This was the headline on www.classiccarsforsale.co.uk on the 1st December 2015 – but is it based on fact or just click-bait journalism?

“The number of classic car owners borrowing money against their vehicles has increased by 46% year-on-year between January and September.”

According to the CAP Gemini World Wealth report 2015, the High Net Worth lending space (HNW lending) continues to grow, but this sort of an increase seemed like at lot.

Further investigation revealed that this claim had been made by a company called (appropriately) HNW Lending who offer peer-to-peer lending on a variety of assets and the claims raised a few pertinent questions.

HNW lending – wealthy people really do borrow money

Cap Gemini’s 2015 World Wealth Report found that the use of credit in HNWI portfolios is widespread:

The WWR found that:

• HNWIs continue to hold 10% of their wealth in alternative investments
• 18% of assets are financed through borrowed money.
• Higher wealth bands (US$20 million+) borrow more – 22%
• Those under 40 borrow more – 27%
• Credit is used largely as leverage for investments (40 percent), followed by real estate (22 percent).

The classic car finance market

After the classic car market crash of the early nineties – which many people attributed to over-enthusiastic borrowing on collectors cars – some people don’t like to talk about classic car finance. They hold that if the classic car market becomes too highly geared then the same thing might happen again. These are generally the same people who were selling those cars for crazy prices at the time…..

The amazing thing about the classic car finance market (and the HNW lending market in general) is the high level of activity in the market when many people aren’t aware it is available – based on our own research we estimate the classic car finance sector to be worth well over £50 million per annum in the UK alone. The good news for those sensitive about market gearing is that this represents only a relatively small but significant proportion of the classics that are sold in the UK.  Few operate in this market and even fewer do any significant volume of finance on classics so a 46% increase in such a short time period would be – quite literally – incredible.

Why do HNWIs borrow money?

Generally speaking  High Net Worth Individuals borrows money for the following reasons.

1. As leverage for investments
2. They are asset rich but cash poor

Over the last few years many HNWIs have determined that financing classic cars is preferable to using their own cash which can be used for other investments and it is estimated that 10-15% of transactions in the collector car market now involve some sort of finance facility. Due to the enhanced values of many collector cars there has also been an increase in equity release schemes which allow owners to release equity from vehicles on which the loans are secured. This allows the owner to retain title of the car and own and enjoy it provided they do not default on the loan.

Distress funding – classic car pawn

Another area of growth in this market has been the logbook loan. For those individuals or businesses that need cash fast there are now an increasing variety of options to pawn your classic car. These typically involve the lender taking your car as collateral and unlike the aforementioned equity release schemes they will not have the car returned to them until the debt is paid in full. These schemes also tend to charge much higher rates of interest although these are typically quoted as a monthly interest charge rather than an APR as a monthly interest rate of 2% sounds more appealing than a potential 50% APR . Peer-to-peer lenders are attracted by “double digit returns” and clearly this does not translate into low interest rates for borrowers although his type of arrangement seems to have a place in the market but is typically speaking a last resort for most classic car owners and HNWIs.

Regulated vs Unregulated credit agreements

This is relatively complex area that we will not cover in this article, however in HNW lending market, as with any other consumer lending market in the UK, borrowing is controlled by law.

Regulated credit agreements are covered by the Consumer Credit Act 1974 which is designed to give consumers and certain individuals (not Limited Companies) protection. The protection covers the purchase of the car and certain aspects of the finance agreement including partial settlement and how early settlement is calculated which includes a rebate of interest and rules governing early settlement charges.

Unregulated credit agreements are not covered by the Consumer Credit Act. Essentially this means that if you want to settle early then the lender is not obliged to rebate any interest and can if they wish charge an early settlement penalty.

Unregulated – the easy way out for brokers & lenders?

For various reasons it is relatively easy for organisations involved in HNW lending to ensure that the credit agreements they offer are not regulated by the Consumer Credit Act. Why would they do this? Because it cuts out red tape and potentially offers improved profitability and in many cases customers are offered unregulated credit agreements where a regulated agreement would be more appropriate for the customer.

Questions HNW borrowers should be asking

In 2015 we have seen an increase in the use of tactics designed to secure business quickly by brokers. This is often not in the interests of the consumer so as with any credit agreement HNWI borrowers should ask themselves the following questions.

1. Am I being offered a regulated agreement – if not, why?
2. Is this the best type of agreement for me?
3. What happens if I want to settle the agreement early?
4. Can I get a more suitable package elsewhere.

Growth in classic car finance and HNW lending

The market for financing “passion assets” has undoubtedly grown over the last two years but classic car finance has in reality been growing since the start of the financial crisis in 2008 when astute enthusiasts realised that it was a great time to buy more cars or as an investor might put it – to diversify and enhance their portfolio of tangible assets…..

As the largest specialist lender in the classic car market we haven’t seen the reported 46% growth across the entire market but it comes as no surprise that more cars are being used to secure HNW lending – even for logbook loans – given the general growth in values. However, it seems inevitable that we will see a steady increase in classic car finance when you consider that in the UK nearly 80% of all new cars are purchased using finance and this figures rises for prestige marques like BMW.

For the time being then we’ll put the headline down to click-bait journalism……

To find out more about the HNW lending options we have available, please get in touch with one of our team.