Car finance concerns as cost-of-living crisis bites

Concerns are mounting about the significant financial debts of new and used cars, as the cost of living crisis continues to put a strain on family budgets.

Vehicle borrowing has risen 253 percent in just over a decade, from £11.2 billion a year in 2009 to nearly £39.6 billion in the past 12 months, according to a new report.

With average wages unable to keep pace with this level of growth and food prices, energy bills and inflation all skyrocketing in 2022, there are fears that many Britons locked into financial arrangements could struggle to keep up with repayments and defaults. to keep.

The scale of UK car financing debt has been revealed in a survey by consumer website The Car Expert.

In particular, personal contract purchase (PCP) has become the most common way to secure new and used vehicles in recent years, with customers drawn to the prospect of financing cars through lower monthly payments.

The survey reviewed figures published by the Finance and Leasing Association (FLA) for the past 14 years.

It found that new car borrowing had risen 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 the UK’s car financing debt, adding a further £22.2 billion in new loans over the same period.

While used car prices are currently high, the future value of older vehicles is more difficult to predict, meaning consumers should be cautious about entering into financing agreements that do not guarantee a vehicle’s future value.

“Our analysis of the FLA’s figures shows a really worrying level of debt as the country faces a lot of uncertainty,” explains Stuart Masson, editor-in-chief of The Car Expert.

‘Political unrest and the cost of living have brought the UK’s reliance on car financing into sharp focus. We could be dealing with thousands of households that will be in serious trouble in the coming months,” he warned.

The survey 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 amount financed per used car has also risen significantly, from just under £9,000 to over £15,500 over the same period.

For years, red flags have been raised about the amount of debt locked into auto financing.

The Financial Conduct Agency (FCA) has been investigating the matter since 2017 as part of an investigation into practices in the auto finance industry.

In January 2021, the financial watchdog took action by imposing a ban on car salesmen and brokers who charge commissions linked to interest paid on vehicle loans to end the sales force encouraging customers. to stretch their budget towards more expensive models in an effort to fill their own pockets.

However, the tight cost of living is now raising new concerns as pressures on household finances mount.

Mr Masson explains: ‘Over the past decade, average wages have not kept pace with the growing debt burden.

“While wages have risen 33 percent since 2009, debt on new cars has more than doubled, while the average debt for used cars has increased by 87 percent over the same period.”

He adds: ‘If the UK continues to experience rising inflation, we may need to brace ourselves for a significant proportion of borrowers to default on their debts, leading to their vehicles being repossessed and possible bankruptcy.’

The report said the drive for motorists to go green is also a cause for concern.

With electric cars at a significant premium to the retail price of petrol or diesel equivalents, even greater debt burdens are borne by consumers who switch.

“As energy costs continue to climb, the promise of lower operating costs to offset those increased borrowing is not coming true,” he warned.

The investigation also shed light on long-standing concerns about misselling PCP deals, which, according to the study, could be mistaken for lease or rental agreements rather than purchase agreements.

The latter means that a consumer borrows the total value of the car minus the first down payment. To keep the car, a final “balloon payment” (the expected future value of the vehicle) must be paid at the end of the loan.

This is usually a significant sum of money that many do not think carefully about when signing the agreement.

The Car Expert says it is common for customers to find at the end of the contract period that their financial situation has changed and that they cannot pay the last amount owed, which means that they have to return the keys to the vehicle.

“The industry needs to be more transparent about what these PCP deals entail.

“Manufacturers, dealers and the media need to be clear that these are purchase agreements and that the balloon payment is part of the total loan amount,” Masson said.

Motorists who are unable to pay their car loans due to cost of living should contact the provider immediately to discuss future arrangements.

The Financial Conduct Authority also has rules to ensure that customers are treated fairly and drivers can contact the Financial Ombudsman Service for advice or guidance.

This can provide a better result and protect credit files in the future.