THE scale of the UK’s car finance debt has been revealed to have reached £40 billion a year for new and used cars following an investigation by The Car Expert, up by nearly £29 billion since 2009.
With the UK enduring a serious and potentially long-lasting cost of living crisis, there are concerns for motorists contracted to expensive finance deals. Almost all new cars are purchased using finance agreements, along with a growing number of used cars, meaning hundreds of thousands of owners could be at risk of defaulting on their debts.
Car finance payments are typically the second largest household expense after mortgage payments, therefore skyrocketing household bills pose a looming threat for consumers.
Stuart Masson, Editorial Director at The Car Expert, said: “Over the past decade, average wages have not kept pace with the growing level of debt. Whereas wages have only increased by 33% since 2009, used car finance debt has increased by 87% while debt borrowed on new cars has more than doubled,” said .
“If the UK continues to experience spiralling inflation, we may have to brace for a significant proportion of borrowers defaulting, leading to their vehicles being repossessed and possible bankruptcy.”
He added: “Compounding the problem, energy costs are soaring, which reduces the incentive for car buyers to switch to electric cars. This means even greater costs for consumers trying to go green as the promise of significant lower running costs has not materialised.”
The analysis conducted by The Car Expert, the automotive consumer advice site, revealed that the UK’s total new and used car borrowing has risen by 253% since 2009. The average amount financed per new car has more than doubled, drastically increasing from just under £12,000 at the start of 2009 to over £25,000 by the end of June 2022.
Similarly, the average amount financed per used car has also risen significantly, escalating from slightly under £9,000 to over £15,500, exceeding inflation rates over the same period.
The increasing popularity of personal contract purchase (PCP) car finance over the last decade is partly responsible for the inflated debt burden. These deals can be mistaken for a leasing or rental agreement, when in fact they are purchase agreements; consumers borrow 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 typically a significant sum of money that many do not thoroughly consider when signing the agreement. Often consumers find that at the end of the loan their financial situation has changed and they are unable to pay the final amount owed.
“The industry needs be more transparent about what these PCP deals entail. Manufacturers, dealers and the media should be clear that these are purchase agreements and that the balloon payment is part of the total amount borrowed,” said Stuart Masson.
“The car industry is utterly reliant on people buying cars they don’t need with money they don’t have. The problem, of course, is that if people no longer have the means to borrow, the car industry will collapse. It was a genuine concern during the Covid shutdowns and remains a risk today as costs of living spiral.”
While borrowing on new cars has swelled to £17.5 billion in the last 12 months, the used car market represents an even larger proportion of the UK vehicle finance debt burden, adding a further £22.2 billion of new borrowing in the last 12 months. Although used car prices are currently strong, a likely weakening over the next year could leave borrowers with a significant negative equity problem if they are no longer able to afford their finance payments.
“Our analysis of the Finance and Leasing Association’s figures shows a truly worrying level of debt as the nation faces a winter of significant financial difficulties. Political upheaval and the cost of living crisis has brought the UK’s reliance on car finance into sharp focus. We are potentially looking at hundreds of thousands of households finding themselves in various degrees of trouble in the coming months,” said Stuart Masson.
