Car finance is dangerously driving up household debt

Debt

Experts fear that the age of cheap car finance will lead to yet another catastrophic financial crisis after figures revealed that almost £31.6 billion was borrowed last year to purchase cars.

Research from the Finance and Leasing Association found that Brits are buying almost 3,000 cars a day – or more than one million cars a year – on finance deals, leading to unprecedented levels of household debt.

Furthermore, the Bank of England (BoE) claimed that car finance is one of the main reasons that household borrowing is rising at the fastest pace in 11 years.

But according to experts, car finance can do more than putting a dent in your monthly wage.

As well as possibly restricting access to the best mortgage deals, the type of loan which car dealers offer you, known as a personal contract plan (PCP), means that borrowers are potentially signed on for life.

A borrower will put down a small deposit, normally in the region of 10 per cent, and then continue to make monthly payments for around two to three years.

After this introductory period, the borrower will be able to buy the car outright with a balloon payment or return the vehicle.

But when the borrower is not able to afford the balloon payment, they can opt to “flip” to another finance deal on another car. And this is a cycle that can continue indefinitely.

Borrowers can also be fined up to 30p per mile for exceeding their agreed mileage limit when handing back the car.

Former pensions minister Baroness Altmann said: “Households that have big mortgages, overdrafts, loans and car finance repayments could be left in an unsustainable position, particularly when interest rates rise.”

Guy Anker from MoneySavingExpert said: “The advantage of car finance is it gives you more flexibility. You can choose whether to buy the car.

“But if your credit score is good enough it’s likely to be a lot cheaper to take out a personal loan if you want to buy a car.”

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