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There is no doubt that the car finance market in the UK is active – but is it healthy? New figures have revealed that, not only are UK consumers spending more than ever before on car finance, but that many are struggling to understand their lease agreements. With around 90% of all car purchases in Britain currently made using finance (according to the Finance & Leasing Association), are we seeing the emergence of a thriving industry or sitting on a consumer debt bubble that could do untold damage if it bursts?
The car finance industry in the UK was worth around £44billion in 2017. Figures from February 2018 showed an increase of 13% in value on those from the year before, which is a healthy percentage for any sector. However, while these figures are great for the businesses involved in the UK car finance industry, they are a little more sobering when considered in the context of consumers. The increase in value within the car finance industry is being driven by a rise in spending by consumers. In fact, a new report found that UK households are borrowing more than £100million a day on finance to buy cars. On average, drivers are putting an average of £15,000 on credit to get behind the wheel – 209,547 cars were bought in this way during the month of May alone.
According to the Finance & Leasing Association these figures are simply a reflection of rising demand for new car purchases and certainly nothing to worry about. However, what is concerning many commentators is the debt bubble that this represents to a nation already heavily indebted, whether that’s via credit cards, personal loans or mortgages. There have also been accusations of heavy handed tactics from car dealers desperate to close a sale pushing people into car finance purchases. And the Financial Conduct Authority has warned about some companies that are pushing unaffordable repayment plans with high interest rates to customers because staff have been incentivised with high sales commissions.
After a house or flat, a car is probably the most expensive purchase that many of us will make in our lifetimes. Using credit such as car finance may be the only way to do this affordably. Personal Contract Plans (PCPs) are by far the most popular way to enter into car finance, often accessible with a deposit of around 10% and then requiring the consumer to make a number of payments over a period of two or three years. When the contract comes to an end, the consumer can either simply return the car to the dealer or buy it by making a balloon payment. However, some experts have highlighted that these deals are not as cheap as they might seem. Interest rates can be between 4% and 7% – often more expensive than a straightforward personal loan – and motorists often find themselves with a huge number of additional charges to deal with at the end of the contract.
A survey carried out on behalf of Kwik Fit found that there are currently around 4.7 million drivers in the UK paying off their vehicles with car finance – that’s around £1bn per month! For each driver the monthly amount payable equates to an average of £226. However, this can vary considerably depending on where you are in the country. Motorists in London, for example, pay on average £269.01 while Scottish drivers benefit from the lowest monthly finance amounts with an average monthly car loan fee of £188.36. Even this can be a significant proportion of monthly income that could be unaffordably increased by even a small change to economic conditions, such as an interest rate rise.
It’s not just cost variation and hidden charges that experts have warned might cause issues in the car finance sector but also the paperwork used. Research by the finance company Admiral found that a large number of consumers are confused by car finance deals. Many still sign up despite not fully understanding what the contract entails. When the goal is to get the car that a consumer wants, many will take whatever deal is on the table but, as Scott Cargill, UK CEO of Admiral Loans says, it’s crucial that consumers…
“…are clear on the different finance options available…Most importantly they need to choose a deal that’s affordable and right for them in the long term.”
The concern is that consumers who don’t really understand their car finance deals, or who don’t really understand the implications of taking out a loan, could end up getting into trouble in the not too distant future.
The car finance sector in the UK is currently thriving with companies generating cash and consumers getting the vehicles they want to drive. However, whether the current finance infrastructure is sustainable, especially if economic conditions change and interest rates rise, is something that no one can yet predict.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read about Alex Hartley
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