Car buyers taking on more and more finance debt

Car Finance news
Car buyers are taking on ever-increasing finance debt

As the issue of car finance mis-selling bounced back into the mainstream media this week, the latest car finance results show that car buyers are taking on ever-increasing amounts of finance debt to fund their new or used car purchases.

Figures published by the Finance & Leasing Association (FLA) showed that, although the number of new car agreements decreased by 13% in line with the SMMT’s registration data (down 14%), the amount being borrowed only dropped by 7%, meaning a net increase in the amount borrowed per car. The average borrowing for new cars, almost always in the form of a personal contract purchase (PCP), reached £19,669 in May 2017. This is a 13% increase on the same month last year, despite the fact that average weekly earnings have only increased by 1% over the same period.

Used car finance results are also pushing upwards, although at a slightly slower rate. Average borrowing for May 2017 was £11,370, an increase of 5% year-on-year. The FLA’s used car figures are less indicative of the overall used car market than for new cars, however. The majority of used car sales are not funded by dealer-sourced finance (eg – cash sales, private sales, registration transfers within households, etc.)

Since 2009, average weekly earnings have increased by approximately 15% across the UK. Yet the average level of borrowing on new cars has increased by about 55% over the same period, and average used car debt has increased by about 38%.

Much of this increase has been fuelled by the popularity of PCP car finance, which has meant customers are buying more expensive vehicles for the same monthly payments. However, the Bank of England is concerned that the increasing level of car finance debt could lead to increasing defaults. With national car finance debt now more than £50 billion, there is a risk that any collapse in the sector could have knock-on effects for the broader economy.

Ultimately, the car industry cannot rely on continuing to push its customers further and further into debt to maintain sales. Whether or not PCP car finance is a bubble waiting to burst, and how any such bubble bursting would impact on the rest of the economy, is still being fiercely debated.

FLA car finance figures, May 2017

Stuart Masson

Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

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