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Alarm Raised That Defaults On Car Loans Could Soar

(Alamy)

6 min read

A number of Tory MPs have expressed concern that the number of people defaulting on car loan repayments could spike as a result of high interest rates squeezing incomes.

The Bank of England raised interest rates in June to 5 per cent – the highest since April 2008 – as part of efforts to tackle high inflation. An increase in the Bank's rate will have a knock-on effect for people holding and taking out new loans such as mortgages and car finance payments, which already eat significantly into people's incomes. 

A Conservative source told PoliticsHome they believed the Prime Minister and senior Cabinet Ministers should pay “more attention” to the build-up of debt in the car sector.  

“We forget just how vital car travel is to individuals and families for their day-to-day lives. Whether it is through reducing fuel duty, or other means, it is important that the Government looks at how to lower car and driving costs for the public,” they added.

Between 2009 and 2022, the average loan taken out by consumers who bought a car on finance rose from £11,964 to £25,039, according to the Car Expert, a specialist data website. Its research found £41 billion of car finance debt remains in the UK economy.

The amount of credit taken out to buy a new car fell from £17.5billion in 2021 to £17.3billion in 2022. However, bank loans used to purchase a second-hand car rose substantially by 18 per cent to £23.billion – leaving £40.7 billion borrowed money in the economy.

Consumers taking out new car loans will be hit by higher interest payments after buying a new car. The number of people taking out car loans to purchase a car has shot up from 40 per cent to 90 per cent in ten years, according to Stuart Masson, of advice website The Car Expert.

“Your household budget is being squeezed which means there is less money to go around to pay off your car finance,” Masson told PoliticsHome.

“What we are seeing anecdotally that there is evidence of people swapping whatever they can in their household budget to make sure they can keep paying their mortgage or rent and car finance.

“Their household running costs have gone up by potentially hundreds of pounds a month. Their car finance amount is hundreds of pounds a month, plus potentially a couple of hundred pounds a month to run the car,” he added.  

Masson said drivers who are subprime – who have a poor credit history – will pay even higher rates on their loans in the coming years, leaving them more vulnerable to defaulting on their payments.

A Conservative MP said there has been a shift from people owning their own cars to leasing them. He added people with existing loans are unlikely to face higher bills in the short term as the interest rate on them will remain fixed. However, he added it was an issue to be concerned about.

"Anything that is a sizable outgoing and a car loan is probably the second or third biggest monthly outgoing after their mortgage, it is going to put a squeeze on families. 

"If people have to give up their cars, that is a problem for mobility and the workplace and it's a problem for manufacturing for this country," they added.

Another Tory MP added the issue could be a potential problem as consumers use car finance "nine times out of ten" when purchasing a new or second-hand vehicle. 

"Most people buy their car with a loan. But the only alternative is that you have to wait longer. But really in these circumstances I don't know what the Government can do. The biggest issue at the moment has to be the Government focusing on mortgages."

James Sunderland, MP for Bracknell, told PoliticsHome he was "concerned" an increase in the number of people who had bought cars on finance could lead more people to default on car loans and an increase in car repossessions.

"Consumers will wish to ensure that any purchase is affordable," he told PoliticsHome. "Sadly, it is a feature of rising interest rates that people may find it harder to pay off their loans and they can become over-extended, which is a worry," he told PoliticsHome

"Sadly, no Government can regulate every aspect of people's lives but getting inflation under control is the best way to get interest rates back down and to boost the economy. And that is exactly what the Government is doing through calm and responsible fiscal policy."

A Government source told PoliticsHome inflation was an "insidious problem" and that tackling it was their main priority. They added that the Government would support the steps the Bank of England takes to tackle the problem. 

Flick Drummond, MP for Meon Valley, also expressed concern that car finance could prove a pressure point for many people. 

“There is no doubt loans will be more expensive and this is particularly a shock after the cheap money over the last ten years or so," she said. 

“But more expensive lending is here to stay and just like my parents’ generation, people will now need to learn how to budget again and be more careful about debt.” 

Max Rangely, editor of the Cobden Centre, a think tank, blamed zero percent interest rates on the increase of car loans and claimed it has stoked a “debt bubble” in the economy

"Far from bringing about a return to prosperity, years of zero percent interest rates served to increase the amount of debt across much of the world following the 2008 financial crisis," he explained. 

“Car loans have been one of several sectors in which credit has ballooned - yet another debt bubble that will unfortunately eventually burst now that interest rates are rising." 

Consumers with car loans are likely to continue facing higher mortgage bills and rent payments as the Bank continues to raise interest rates. Britain's economic growth is expected to fall behind the Eurozone next year.GDP is expected to fall by 0.6 per cent while EU nations such as Germany, Spain and France are expected to grow by 0.5 per cent. 

Meanwhile, millions of people in the UK are thought to be relying on "excess savings" accrued during the pandemic to maintain their levels of spending. 

The Bank of England said a net £4.6billion was taken out of banks and building societies, according to the FT. Economist Daniel Mahoney at Handelsbanken told the paper there was "strong evidence" consumers were using money they had saved in the pandemic to "sustain living standards".

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