With inflation soaring to unprecedented levels since the dark days of the 1970s, it’s clear that buying a car will become less and less affordable. When the financial crisis hit in 2008, the European Bank lowered interest rates, allowing automakers to offer their customers incredibly enticing financing packages. These low prices kept a trickle of buyers pouring through dealer doors until the market started to recover.
Throughout the turmoil of Brexit and the Trump administration, interest rates have remained relatively low and paybacks on modest cars have generally remained affordable. However, with a rising wave of inflation fueled by a war-related energy crisis and a backdrop of a looming climate crisis, it looks like the days of cheap car loans are over. When they’re gone, the days of cheap cars might—period—be over.
At the moment it doesn’t look apocalyptic from an Irish point of view. Brian McNulty is Commercial Director of Mobilize Financial Services Ireland, which was known as Renault Bank until it was recently rebranded. Renault Bank has been operating in Ireland for more than 10 years and in that time has provided €1.7 billion in loans and PCP deals to Irish car buyers. That is enough to finance more than 100,000 Renault and Dacia models during this period.
McNulty acknowledges the challenges of the moment but says car buyers are weathering the storm for now. “It’s a concern for us, as is our customer base, who are having to navigate these increases and the uncertainty that comes with them,” he told the Irish Times. “However, current demand still exceeds supply and our funding penetration rate is over 60 percent, which is up from last year. All of our financing arrangements have a fixed interest rate, giving our customer base peace of mind knowing their monthly payments won’t fluctuate. By saying we monitor this with our customer base.”
In the U.S. market, there are worrying signs that late and missed auto loan payments have increased — albeit still at lower levels than pre-pandemic levels — and that vehicle seizures have increased compared to 2020. Average Monthly auto loan payments in America recently hit an all-time high of $712, while Ford’s chief financial officer, John Lawler, said at the Deutsche Bank Global Auto Industry Conference, “We’re looking at every data point we can find to get a reading.” where the consumer is and where they are headed in the face of inflationary concerns and economic pressures. We see some headwinds when it comes to late payments, perhaps as a leading indicator.”
McNulty says that has not been the case in Ireland so far. “In short, no, we haven’t seen that,” he told the Irish Times. “There are a few factors that help. Number one; Our customers have fixed payment plans and number two; Residual values are extremely strong in our portfolio and offer equity to our clients.
With a small car, these additional costs can hardly be coped with. Getting started with mobility with a combustion engine will therefore be significantly more expensive
The Covid-19 pandemic has been a financially challenging time for many people, but others have been able to save money during this time. Increases in the cost of living will erode potential savings and we are monitoring this closely, but the impact has been limited. When it comes to arrears, each client has a different financial situation and we treat each one on a case-by-case basis. To date, we have not experienced any increase in arrears, allowing us to manage each client individually from a resource perspective. I would urge any of our customers to give us a call if they are having difficulties.”
These are, of course, existing customers who have already found the funds needed to make a down payment and qualify for financing. For those who still want to buy a car that’s even remotely affordable, the window of opportunity could be closing. Rising costs for internal combustion engines could force Volkswagen to give up the long-lived Golf model once the current eighth-generation version has run its course.
That’s the view of VW brand boss Thomas Schaefer, who told German newspaper Welt that the new emission control technology required by the next round of Euro7 emissions regulations could make the traditional Golf uneconomic to build.
The additional costs for these systems – allegedly up to 5,000 euros per car – are bad enough, but any new Golf would have an exceptionally short lifespan. Since the current model was introduced in 2019, it will not be due for replacement until 2026 at the earliest. That leaves just four years to recoup development costs before many European nations begin to stop selling internal combustion engine cars. In essence, VW admits that the death warrant has been signed for the small, affordable car.
“With a small car, these additional costs are almost unbearable. Getting started with mobility with a combustion engine will therefore be significantly more expensive,” said Schäfer. “Starting prices of 10,000 euros will no longer exist in the future. Individual mobility is a basic need and must remain achievable in the future. Whether it’s worth developing a new vehicle that doesn’t last the full seven or eight years remains to be seen. It’s extremely expensive.”
The death of the Golf would be a significant moment – more than 45 million Golf models have been sold worldwide since the first generation was launched in 1974. The Golf’s success has saved VW twice – once in the 1970s when the company desperately needed something modern to replace the original Beetle, and again in the 1990s when more stylish Golf models allowed VW to move upscale to push and charge more for his cars, which staved off impending bankruptcy.
Of course, the Golf itself is hardly cheap anymore, the cheapest model currently costs 31,000 euros. The smaller Polo may not get a direct replacement as automakers are currently finding it extremely difficult to add up the profit and loss totals in the production of small electric cars. VW already has plans for a compact ID. 2, which is sold in Germany for around €25,000 and has an electric range of around 350-400 km. “That’s the psychological selling point at the moment,” says Schäfer.
Schäfer was recently quoted in the German media as saying that those who would have bought a cheaper Golf in the past might now be better off buying on the used market, a statement that caused quite a bit of outrage among some.
However, VW isn’t the only one aiming to give way to smaller, more affordable models. Ford has confirmed there won’t be a next-gen Focus or Fiesta, while Mercedes has announced it will cut the offering of its compact front-wheel drive cars, based on the A-Class, in favor of larger investments in higher-end models. That’s where the profit margins are. “We’re not chasing volume,” said Mercedes CFO Harald Wilhelm in an interview with reporters.
Forget ownership completely and just snag an instant rental car off the street if and when you need it?
Even if you make the necessary down payment for a new car and can afford the monthly installments, you may well be refused a loan based on the car you want. Bank Australia announced this week that it will stop offering car loans for internal combustion engine vehicles from 2025.
Only electric car loans are approved. “Our announcement today is the start of a conversation with our customers and a signal to the broader market that if you are considering buying a new car, you should seriously consider an electric vehicle, both for its impact on the climate and for its own Lifetime cost savings,” said Sasha Courville, Bank Australia’s Chief Impact Officer. The bank will continue to offer loans for used vehicles with internal combustion engines.
Is this all a blip? Is it all a mess, driven by a war of aggression that has triggered an energy crisis against the backdrop of a climate emergency? Will it all calm down in a few years and will we go back to a kind of “business as usual”? Or is this the death of the cheap small car and the end of cheap credit?
“It’s too difficult to predict,” says McNulty of Mobilize. “The war in Ukraine has created a lot of uncertainty in the financial markets and interest rates have been affected. Mobilize Financial Services is at the heart of the Renault Group’s strategy, helping us to focus even more on developing products that support use, flexibility and affordability. Over the past few months we have demonstrated our ability to break down these barriers and we will continue to adapt during these challenging times.”
Of course, Mobilize is in a relatively good position as it provides credit to Dacias, arguably the only brand that remains committed to offering truly affordable vehicles (even Skoda has moved into the higher priced sphere at this stage). In addition, Mobilize wants to convert buyers, some of them anyway, into subscribers. “Our aim is to offer customers a usage-based offer, because for most customers their car is at their doorstep most of the time,” McNulty told The Irish Times. “Enormous efficiency gains for the environment can be achieved with a pay-per-use payment model. In the coming months and years, we will offer additional products and services that support this strategy. The customer ultimately decides how long it lasts, but we believe that a car will have more users over a longer period of time.”
Mobilize will launch a two-seat electric city car called Duo next year, which can be rented for short trips from on-street locations. In addition, the company also wants to switch to e-scooters and charging solutions, with plans for 200 fast-charging stations for electric cars across Europe.
Maybe that’s the solution for cheap car buyers. Forget ownership completely and just snag an instant rental car off the street if and when you need it? It may seem an enticing solution, but it will take a huge shift in the way millions of people view car use and ownership to get us there.