Concerns about the significant leverage involved in financing new and used cars are growing as the cost of living crisis increasingly strangles household budgets.
Borrowing for vehicles has risen 253 percent in just over a decade, from £11.2 billion a year in 2009 to almost £39.6 billion over the last 12 months, according to a new report.
With average wages failing to keep up with this level of growth, and food prices, energy bills and inflation soaring in 2022, there are fears many Brits tied to finance deals may struggle to keep their repayments and pay down debt .
Car finance concerns during cost-of-living crisis: A whopping £39.6bn a year is tied up on borrowing for new and used cars as Brits face strained finances
The extent of the UK’s car finance debt burden has been revealed in research by consumer website The Car Expert.
In particular, Personal Contract Purchase (PCP) has become the most common method of securing new and used vehicles in recent years, with customers drawn by the prospect of financing cars through lower monthly payments.
The research reviewed figures published by the Finance and Leasing Association (FLA) over the past 14 years.
Borrowing for new cars was found to have swelled to £17.5 billion in the 12 months to the end of June.
However, the booming used car market accounted for an even larger share of UK vehicle finance debt, adding a further £22.2 billion in new lending over the same period.
Although used car prices are currently high, the future value of older vehicles is harder to predict, meaning consumers need to be cautious about entering into financing arrangements that do not guarantee a vehicle’s future value.
“Our analysis of the FLA’s numbers shows a really worrying level of debt as the nation faces a great deal of uncertainty,” said Stuart Masson, editorial director at The Car Expert.
“Political upheaval and the cost-of-living crisis have brought Britain’s reliance on car finance into sharp focus. We are looking at potentially thousands of households facing serious difficulties in the coming months,” he warned.
The research found that the average amount financed per new car more than doubled between 2009 and the end of June 2022, rising dramatically from just under £12,000 to over £25,000.
Similarly, the average loan amount per used car has also increased significantly, escalating from just under £9,000 to over £15,500 over the same period.
For years, red flags have been raised about the debt tied up in auto financing.
The Financial Conduct Agency (FCA) has been investigating the issue since 2017 as part of an investigation into practices in the motor finance industry.
In January 2021, the Financial Regulator took action by introducing a ban on car salespeople and brokers from charging the commission linked to the interest rate paid on vehicle loans, to discourage salespeople from encouraging customers to shift their budgets to more expensive models stretch out to do this to fill their own pockets.
However, the cost of living crisis is now a source of renewed concern as household finances are under increasing pressure.
The average UK wage has risen by 33% since 2009, but debt for new cars alone has more than doubled over the same period
Mr Masson explained: “Over the past decade, average wages have not kept pace with growing debt.
“While wages have risen 33 percent since 2009, borrowing for new cars has more than doubled, while average debt used-car financing has increased 87 percent over the same period.”
He adds: “If the UK continues to experience rising inflation, we may have to expect a significant proportion of borrowers to default on their debt, resulting in their vehicles being impounded and potentially bankrupt.”
The report says the drive for motorists to become more environmentally friendly is also increasing concern.
With electric cars at a significant premium over the retail price of a petrol or diesel equivalent, even greater debt burdens will be shouldered by consumers who switch.
“As energy costs continue to drive higher, the promise of lower operating costs to offset this increased borrowing is not on the horizon,” he warned.
If the UK continues to experience a spiral of inflation, we may have to expect a significant proportion of borrowers to default on their debt, resulting in their vehicles being impounded and potentially bankrupt
Stuart Masson, Editor-in-Chief at The Car Expert
The investigation also shed light on long-standing concerns about mis-selling PCP deals, which are said to be more likely to be confused with leasing or rental agreements than sales agreements.
The latter means that a consumer borrows the total value of the car minus the initial deposit. In order to keep the car, a final “balloon payment” (the projected future value of the vehicle) must be paid at the end of the loan.
This is usually a sizable sum that many do not thoroughly consider when signing the agreement.
The car expert says it is common for customers to find that their financial situation has changed at the end of the contract period and they are unable to pay the balance owed, meaning they have to return the vehicle’s keys.
“The industry needs to be more transparent about what these PCP deals entail.
“Manufacturers, retailers and the media should be aware that these are purchase agreements and that the balloon payment is part of the total amount borrowed,” Masson said.
Drivers who are unable to maintain their auto finance payments due to the cost of living crisis should contact the provider immediately to discuss how to proceed.
The Financial Conduct Authority has also established rules to ensure customers are treated fairly and drivers can contact the Financial Ombudsman Service for advice or guidance.
This could lead to a better result in the future and protect credit files.
https://www.soundhealthandlastingwealth.com/business/car-finance-concerns-as-cost-of-living-crisis-bites/ Concerns about car financing as a cost of living crisis