Some £41BILLION locked up in finance

• There’s been a 263% rise in annual car finance between 2022 and 2019 (£11.2bn)
• Average weekly earnings have risen only 14% in that 13-year period, figures show
• Scale of borrowing has many concerned that drivers could default on debts 

The amount UK drivers borrowed to pay for cars hit a new record in 2022, rising by over £4billion compared to the previous year, according to the latest report.

Despite fewer new and used car sales recorded last year and a decline in the number of finance deals being taken out, analysis of the full-year data published by the Finance and Leasing Association (FLA) shows that borrowing ballooned to £40.7billion.

It has been partly driven by average finance amounts per vehicle reaching never-before-seen levels for both new and second-hand cars, says The Car Expert.

This is despite interest rates soaring in 2022 and the increase in cost of living, which insiders say are putting a concerning strain on household finances.

To put the rise in borrowing into perspective, in 2009 some £11.2billion was locked up in motor finance.

That means there’s been a 263 per cent rise between then and last year. 

For context, average weekly earnings have risen from £435 in 2009 to £614 in 2022 – that’s just a 41 per cent increase. 

New car buyers borrowed £25,325 on average in 2022, up from £23,746 in the previous year – and more than double the amount incurred in 2019, which was around £12,000 13 years prior.

Used purchases incurred £15,475 of debt, up from £14,113 respectively in 2021, the FLA’s data shows. 

DEBT LOCKED UP IN CAR FINANCE (2009 VS 2022)

2009

New car finance: £5.8bn

Used car finance: £5.4bn 

Total car finance: £11.2bn

2022

New car finance: £17.3bn

Used car finance: £23.4bn 

Total car finance: £40.7bn

Source: The Car Expert having analysed figures from the Finance & Leasing Association

With borrowing reaching new heights at a time when the UK is in the clutches of a cost of living crisis, there is a chance that some motorists could find themselves in financial distress.

There are growing concerns that many Britons locked into finance arrangements could struggle to keep up repayments and default on debts, especially as average wages fail to keep pace with this level of growth – and food prices, energy bills and inflation remain worryingly high.

But despite the financial strain of the cost of living squeeze last year, more than 2.2 million drivers used car finance agreements in 2022, up around 3 per cent on 2021.

Stuart Masson, editorial director at The Car Expert, said: ‘The UK’s addiction to car finance has grown significantly since 2009, and with another record year of total borrowing last year during the cost of living crisis, we may see household finances under increasing pressure.

‘Average borrowing for both new and used vehicles has increased again, too, despite rising interest rates.’

Masson added: ‘For the previous four years, more than 90 per cent of new car buyers financed their car through dealer-sourced finance. 

‘However, that has dropped substantially to 84 per cent – the principal reason for this is the rapidly growing number of new electric vehicle sales, which are often financed through salary sacrifice schemes that benefit from significant tax savings.

‘As electric cars continue to rise in popularity, so will salary sacrifice. This means the car payments are taken from an employee’s pre-tax salary, while you must pay tax on the value of the car, the taxation rate (called benefit-in-kind, or BiK) is much lower for EVs than it is for petrol or diesel cars.

‘As EVs are only going to get more popular in coming years, we are likely to see a permanent shift into how new cars are financed. 

‘The chancellor has pledged that new EVs will maintain their benefit-in-kind advantage until at least 2028, but don’t forget that Governments can U-turn at a moment’s notice.’

The used car marketplace saw the reverse of new cars with fewer vehicles sold than in the previous year but more of those cars being financed via dealership-sourced lenders.

About 600,000 fewer used cars – a 9 per cent decrease – changed hands in 2022 compared to the previous year, according to SMMT data published last month. 

However, the number of used car finance agreements increased by more than 130,000, which is around 10 per cent. On top of that, the average amount borrowed jumped substantially.

With the volume of car finance deals on both new and second-hand models declining, an independent study found that drivers are increasingly likely to shift away from long-term arrangements on motors and will look to keep hold of their existing vehicles for longer.

Mobility provider, Sogo, recently surveyed 2,006 British drivers and found that only 14 per cent would be much more likely to commit to a long-term financial lease to fund their next vehicle than 12 months ago.

Car finance Q&A

Q: What are the main car financing options?

A: Most people buying a new or used car will do so using some sort of car finance. The most common ways of financing a vehicle are through PCP (personal contract purchase), HP (hire purchase), PCH car leasing (personal contract hire), salary sacrifice and a newly emerging option, subscription services.

PCP is currently by far the most popular way for private customers to finance a new or used vehicle. 

Q: What is salary sacrifice?

A: Salary sacrifice is a way of leasing a new car with payments taken from your pre-tax salary, rather than after-tax salary. It’s a more complicated form of financing to understand, and your employer must be signed up with a service provider to manage it, but it can be significantly cheaper than a lease or PCP on the same car – especially for electric cars.

Employees can sacrifice a fixed amount of their gross salary and in return, they can lease a brand new environmentally friendly car. There are three main salary sacrifice benefits for employees, including savings on income tax and National Insurance, no deposit or credit check required and an all-inclusive monthly fee. 

Q: What are the options for those stuck in finance deals they can’t afford?

A: In some circumstances, you can settle an PCP or HP agreement early. There is a consumer right that is built into every regulated PCP and HP car finance agreement – the right to voluntary termination (VT). Voluntary termination is the legal right for a consumer to end a finance agreement early and walk away in certain circumstances.

Voluntary termination tends to be more helpful for HP finance rather than PCP finance, but it depends on how the loan was set up to begin and other potential complexities.

Q: Why is the UK borrowing so much for increasingly expensive cars?

A: UK drivers are borrowing far more to finance their cars compared to just 10 or 15 years’ ago. Not only are more people financing new and used cars, but the vehicles are getting more expensive, so people are borrowing more per vehicle. While wages have increased over the years, it has not kept pace with the amount that people borrow – weekly wages have increased by 41% since 2009 but new car finance levels have doubled.

Although the cost of cars has increased over the last decade – inflation alone makes up a fair amount of this increase – the concern is that buyers are borrowing more and more money to replace their cars with like-for-like models, which may not be sustainable.

With significantly higher debt levels, there’s an increased chance that more people will default on their loans if they hit any kind of unexpected financial troubles, such as sudden increases to their household budgets as seen over the last year.