Auto financing concerns as the cost of living crisis bites

Concerns about huge debt related financing for new and used cars are growing as the cost of living crisis grips household budgets.

Car borrowing has risen 253 per cent in just over a decade, from £11.2bn a year in 2009 to nearly £39.6bn in the past 12 months, according to a new report.

With average wages failing to keep pace with this level of growth, and food prices, energy bills and inflation all set to overshoot in 2022, there are fears that many Britons locked into financing arrangements could struggle to keep up and default on debt.

Car finance fears during the cost of living crisis: £39.6bn a year is locked up in borrowing on new and used cars as Britons face strain on their finances

The scale of the UK’s car finance debt burden has been revealed in an investigation by consumer website The Car Expert.

Personal Contract Purchasing (PCP) in particular has become the most popular method of insuring new and used vehicles in recent years, with customers attracted by the prospect of car financing with low monthly payments.

Debt held in auto financing (2009 vs. 2022)


New Car Financing: £5,832,000,000

Used car financing: £5,391,000,000

Total car financing: 11,223 million pounds sterling

2022 *

New Car Financing: £17,432,000,000

Used car financing: 22,197 million pounds sterling

Total car financing: £39,629,000,000

Source: Automotive expert after analyzing figures from the Finance and Leasing Association

* Figures based on auto financing for 12 months from Q2 2021 to Q2 2022

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

It found that borrowing on new cars swelled to £17.5 billion in the 12 months to the end of June.

However, the booming used car market accounts for a larger proportion of the UK’s car finance debt load, adding a further £22.2 billion of new borrowing in the same period.

Although used car prices are currently strong, it is difficult to predict the future value of older vehicles, which means that consumers need to be careful about committing to financing agreements that do not guarantee the future value of the vehicle.

“Our analysis of the FLA numbers shows a really worrying level of debt as the nation faces a lot of uncertainty,” explains Stuart Mason, managing editor at The Car Expert.

Political turmoil and the cost of living crisis have brought the UK’s reliance on car finance into sharp focus. We are likely to be looking at thousands of families finding themselves in serious trouble in the coming months.

The investigation found that the average amount being financed per new car more than doubled between 2009 and the end of June 2022, rising dramatically from less than £12,000 to more than £25,000.

Similarly, the average amount financed per used car has risen dramatically, rising just under £9,000 to over £15,500 in the same period.

For years, there have been red flags raised about the amount of debt booked in auto financing.

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

In January 2021, the FSA took action by banning car sellers and brokers who charge a commission linked to the interest rate paid on car loans to cap sales staff to encourage customers to stretch their budgets to higher-priced models in a bid to line their own pockets. .

However, the cost of living crisis is now raising new concerns as pressure mounts on household finances.

Average wages in the UK have increased by 33% since 2009, but debt borrowed on new cars alone has more than doubled in the same period.

Average wages in the UK have increased by 33% since 2009, but debt borrowed on new cars alone has more than doubled in the same period.

Mason explained: “Over the past decade, average wages have not kept pace with the increasing level of debt.

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

He adds: “If the UK continues to face spiraling inflation, we may have to prepare for a large proportion of borrowers defaulting on their debts, leading to repossession of their cars and possible bankruptcy.”

The report said motorists’ motivation to go green compounded the concerns.

With electric vehicles priced significantly higher than the retail price of gasoline or its diesel equivalent, those consumers who make the switch incur greater debt loads.

“With energy costs constantly rising, the promise of lower operating costs to compensate for increased borrowing is not forthcoming,” he warned.

If the UK continues to face spiraling inflation, we may have to prepare for a large proportion of borrowers defaulting on their debts, leading to repossession of their cars and possible bankruptcy.

Stuart Mason, Managing Editor of The Car Expert

The investigation also shed light on long-running concerns about misselling PCP deals, which it says could be ‘mistaken for lease or rental agreements’ rather than purchase agreements.

The latter means that the consumer will borrow the total value of the car minus the initial deposit. In order to maintain the car, the final “balloon payment” (the expected future value of the car) must be made at the end of the loan.

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

The auto expert says it is common for customers to find that at the end of the contract period their financial situation has changed and they are unable to pay the final amount due, which means they have to hand over the car keys again.

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

“Manufacturers, dealers and the media should make it clear that these are purchase agreements and that the balloon payment is part of the total amount borrowed,” Mason said.

Motorists who are unable to continue making their auto finance payments due to a cost-of-living crisis should contact their car provider immediately to discuss arrangements moving forward.

The FCA also has rules in place to ensure customers are treated fairly and drivers can contact the Financial Ombudsman Service for advice or guidance.

Doing so may produce a better result as well as protect your credit files in the future.

The British Car Rental Association (BVRLA) adds: ‘If you’re concerned about being able to afford your monthly rental payments, the first thing you should do is talk to your rental company.

Be open about your situation and have that conversation before you miss out on any payments.

The rental company must provide you with an appropriate level of care and support, taking into account your personal circumstances to find a solution.

BVRLA members adhere to a strict code of conduct to protect clients, with an alternative dispute resolution service available for unresolved cases.

Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.