Car finance is on the increase in the UK, with approximately 86 per cent of private new car purchases using a credit facility in the year up to June. The use of dealership finance is around double what it was in 2009, equating to a 20 per cent rise each year since then.
As a result, the Bank of England has become increasingly concerned over a new credit bubble driven by cheap motor finance.
But are we facing a 'car loan time bomb' as a recent Sun headline suggested?
According to the Finance & Leasing Association there has in fact been a 16 per cent fall in sales using garage credit schemes across April, May and June. However, the total value of the loans has remained steady over this period.
Geraldine Kilkelly, chief economist at the FLA, said car finance deals were “in line with industry expectations of a broadly stable picture for the year as a whole”.
But the Bank of England is worried that lenders are taking ever greater risks by offering ever bigger loans, thereby increasing their liabilities.
These concerns are despite a Financial Conduct Authority (FCA) investigation into the high cost of credit deals to lower income customers. Record numbers of people have been complaining about car finance deals, according to figures released by the Financial Ombudsman in June.
The Guardian is less convinced that a car finance credit bubble is in the offing. It suggests the shift away from new cars to used cars should alleviate worries at Threadneedle Street, who calculated that car loans offered to buyers at the point of sale were worth £58bn at the end of March.
Overall, consumers are shying away from buying cars whether new or used. According to the Society of Motor Manufacturers and Traders, new car sales in the UK fell by 9.3% in July, while used car sales were down 5.1% in the first half of 2017.
The Bank of England would be troubled by falling used car prices, as those who buy brand new cars on hire purchase deals might be left with cars worth considerably less than they had envisaged once the debt is repaid.
Others, however, suggest that as consumers switch from new to used cars, vehicle value could be protected.
David Bailey, professor of industry at Aston University, was quoted in the Guardian as saying: “If we see the new car market cool, the second-hand market will probably do better, and in a sense that might support residual values of the cars coming onto the second-hand market.”