DRIVERS have been warned they face having to cough up hundreds of pounds more in car payments as the cost of living crisis hits.
Around 90 per cent of car buyers in Britain finance their vehicles using Personal Contract Payments (PCP) where they take out a loan on a fraction of the car’s value and pay the money back over a two-to-four-year period.
At the end of that period they can either make a “balloon payment” to buy the car outright, although most opt to take on another PCP loan on a new car.
However, an expert has warned the PCP bubble could burst due to a “perfect storm” of high interest rates on mortgages and soaring utility bills, which would leave borrowers in a “mountain of debt” forcing them to consider abandoning their car in order to save their home.
Interest rates for PCPs are fixed for the duration of the term, but Start Masson, from The Car Expert said the average interest rate on new car finance had already hit 10 per cent.
He told The Telegraph: “On used cars, you’re looking at 10-15 per cent or more for a lot of people.”
Mr Masson added: “What the PCP has encouraged people to do is borrow more money on a more expensive car for the same monthly payment.
“The problem comes when the situation goes south, if you can’t afford your monthly payment, with incomes being eaten away by utility bills, you’re actually carrying a lot more debt than you probably were previously.”
Brian Gregory, from the trade body the Alliance of British Drivers, said drivers had been left “in an almost impossible position” due to the cost of living crisis.
He added: “The situation is only going to get worse. Everything is getting more expensive and all of these things are feeding in to make everybody’s life more difficult.
“Certainly if you’ve got a PCP package, it’s going to make it much worse.”
While there are no penalties for defaulting on PCP payments, other than having to return the vehicle, the Finance and Leasing Association (FLA) warned some drivers could fail future affordability checks when applying for future loans.
The FLA Director of Motor Finance & Strategy Adrian Dally said: “For most people, a car is a necessity, not a luxury, but the cost of living increase combined with a higher interest rate environment means household budgets will be under pressure, and inevitably some new customers won’t meet the criteria for a motor finance loan.”
Part-time mechanic Stefan Kleinekoort, 27, said he had traded in his PCP-financed BMW for a far cheaper Ford Fiesta, saying he “couldn’t justify” the cost.
Mr Kleinekoort had been paying £324 a month for 2020-era BMW on a 24-month lease that had an upfront payment of just under £4,000.
He now pays £205 a month for the Fiesta.
“I used to feel like I needed a nice car for perception, but since the cost of living crisis and seeing many of my friends struggling financially - it just feels wholly inappropriate to justify the cost,” he said. “I have had a mortgage hike for my house since my five-year fixed rate ran out a couple of months ago and obviously, my energy bills have increased quite significantly.”
Figures from the FLA show that in the last three months there were 175,727 car sales using PCP, this compares to 201,692 in the same period last year, a drop of 13 per cent.
That has forced lenders to increasingly push older models they otherwise would not have funded, or to offer unconventional loans in order to keep customers on.
Ian Plummer, from car sales website Auto Trader, said a rising number of drivers at the end of their term were “refinancing” the balloon payment – effectively taking out a second loan.
He said: “So, rather than switching to a new vehicle, a growing number of people are choosing to stick with their existing car for longer.
“This may well be a case of increasing economic prudence among motorists.”
Carlos Treadway, from lender Ford Credit, said: “With the cost of living crisis continuing to hit consumers from every angle, we expect flexible car finance to become all the more valuable for drivers over the coming months and possibly beyond.”
