Growing concern over car loan debt

24th October 2017

The rapid rise in the amount of money being lent as car loans has given rise to concerns that this form of lending could, if left unchecked, lead to the next financial crisis. The amount borrowed annually to buy new cars has trebled over the past eight years, reaching more than £30bn last year.

Nine out of ten new private car sales are now financed by personal contract plans, enabling those on low incomes and with poor credit scores to afford brand new cars. Under these deals drivers effectively pay an up-front fee and a monthly ‘rental’.

The concern is that UK households are already carrying high levels of personal debt, meaning that if borrowers were to come under pressure from, say, rising interest rates or unemployment, repayment of these car loans would come under pressure too. The Bank of England has raised its concerns and the Financial Conduct Authority has placed the sector under review. A House of Lords committee has called for stronger controls on ‘rent to own’ deals.

This means that drivers can expect to face tougher affordability checks when applying for car finance in the future.