For more than a decade, rock-bottom interest rates have allowed hundreds of thousands of drivers to buy expensive cars on finance agreements.
But now there are growing concerns that Britain’s spending spree on car finance could soon collapse as repayments become increasingly unaffordable, against a backdrop of rising mortgage costs and household bills.
Since the financial crisis, Personal Contract Purchases (PCP) have become British drivers’ go-to method of car finance – with 80pc of car purchases in the UK made using them, according to adviser The Car Expert.
As a result, total car finance debt has rocketed by 253pc since 2009, from £11bn to nearly £40bn. The average amount financed for a new car has also crept up from less than £12,000 to £25,000 in the same period.
PCPs function similarly to mortgages: drivers take out a loan on a new or used car, repaying a share of the car’s value over a fixed term, with interest. Most deals last two to four years. By the end of the term, a driver can choose to return the car or buy it by paying the outstanding value upfront – known as a “balloon payment”.
Essentially, a driver taking out one of the loans pays for the depreciating value of the car while they own it.
As with any loan, drivers must pass an affordability check before they buy a car on PCP, but concerns are mounting that a “perfect storm” of high mortgage rates, soaring energy bills, stagnant wages and high inflation will make the practice unaffordable for many.
