Car finance debt from dealerships for 2018 to date has smashed previous records, as new and used car buyers continue to borrow more and more money on their cars.
Point of sale (POS) consumer car finance lending for new cars topped £10 billion for the first six months of 2018, according to data released today by the Finance and Leasing Association (FLA), while lending for used cars was more than £9 billion. This is an increase of 8% and 17% respectively over last year’s record numbers, despite fewer cars being sold.
The average borrowing for both new and used cars hit record levels in the last quarter, with average new car borrowing at about £20,000 (up 7% over last year) and used car borrowing at about £12,000 (up 5% over last year). Over the same period, average weekly earnings across the UK have only increased by 2%, suggesting that buyers are spending more of their income on car finance payments than ever before.
For new car buyers, average car finance debt now represents more than 39 weeks of average earnings, up from 29 weeks at the start of the decade. Much of this growth has been fuelled by the popularity of personal contract purchase (PCP) finance, meaning greater debt but lower monthly payments thanks to the enormous balloon payment that hangs over the length of the agreement. The problem is that if a customer needs to settle the finance agreement early, they have an enormous debt that they generally can’t afford to clear.
Used car finance growth is also being driven by the increasing popularity of PCP agreements, although the interest rates are not usually as favourable on used cars as they are for new cars.
About 90% of all privately-purchased new cars are financed at point of sale, with car dealerships acting as brokers for the finance companies. For used cars, the figure is harder to judge but probably less than 20% as many used cars are sold privately or financed by other means (such as a personal loan from a bank).
|Cars bought on finance by consumers through dealerships – June 2018|
|New business||Jun 2018||% change on prev. year||3 months to Jun 2018||% change on prev. year||12 months to Jun 2018||% change on prev. year|
|Value of advances (£m)||1,717||+9%||4,962||+18%||19,479||+4%|
|Number of cars||83,470||+1%||243,495||+12%||978,713||-6%|
|Value of advances (£m)||1,460||+11%||4,562||+16%||16,528||+13%|
|Number of cars||119,903||+4%||383,302||+10%||1,412,991||+7%|
|Value of advances (£m)||3,176||+10%||9,524||+17%||36,007||+8%|
|Number of cars||203,373||+3%||626,797||+11%||2,391,704||+2%|
Source: Finance and Leasing Association
Increased interest rates have had no impact on car finance debt
Based on this record car finance lending for the first half of 2018, it appears that the Bank of England’s move to increase interest rates last November has done absolutely nothing to slow borrowing on new and used cars. Another increase has been announced this month, so it remains to be seen whether or not this will make any difference to car finance borrowing over the rest of this year.
There are still plenty of low-rate or even 0% APR new car deals around in the marketplace, and the ongoing desperation of car manufacturers and dealers to sell every car they can means that we are unlikely to see any substantial hikes in the rates offered to customers.
If rates do start creeping up, we can expect to see dealers steering customers towards ever-longer terms to keep their monthly payments down. Whilst that may help them get a sale today, it’s just postponing an inevitable problem of declining sales further down the line.
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