Despite the poor results for the peak new car sales month of September, it was not all bad news for car finance lenders. The number of personal new car finance deals fell by 11%, which was more than the corresponding sales drop of 9%, however the total amount of money lent was the same as September 2016 according to the latest figures published by the Finance & Leasing Association (FLA). That meant that the average amount borrowed on new cars hit a record £19,904, up 12% on the same month last year.
Used cars also continued their growth in terms of car finance, with volume up by 3% and total lending up by 9%. This means that the average amount borrowed on used cars also hit a new record of £11,609, a 6% increase on the same month last year. Used car sales figures for July to September are expected to be released later this month, but the finance figures are usually a good guide to the broader market.
Average borrowing on both new and used cars has been steadily increasing for the several years, outstripping both average weekly earnings (which haven’t grown anywhere near as much) and “real” household income (which has been flat for years). At the industry’s lowest ebb in early 2010, after the 2008 financial crisis, the average borrowing was £11,782 against an average weekly earning of £442. In September 2017, average weekly earnings had increased to £507 (up 15%), but average new car borrowing was up to £19,904 (up 69%). Used car borrowing is up from £9,211 in early 2010 to £11,609 in September 2017 (a 26% increase).
Much of this growth has been fuelled by the boom in PCP car finance over this decade, with customers borrowing more money without increasing their monthly payments. However, it has meant that the total debt on new car finance has increased massively over that time. The Bank of England and the Financial Conduct Authority are both continuing investigations into the car finance industry to determine whether any action needs to be taken to ensure the viability and sustainability of the car finance market.
New car buyers are borrowing an average of £2,200 more per car than they were 12 months ago, which is more than a month’s pay according to average weekly earnings. Used car buyers are borrowing about £630 more compared to the same month last year.
With the Bank of England announcing a 0.25% interest rate rise this month, it will be interesting to see if there is any effect on car finance. Interest rates remain at an historic low, so finance is still very cheap for most customers and it’s likely to stay that way for the foreseeable future.