‘Explosion’ in finance on new cars could spell trouble for used market

Experts warn drop in values and rise in interest rates could see market flooded with second-hand stock

Finance, deal, buy, sell, dealer, happy

Industry experts are warning buyers of the “explosion” of car finance and potential problems caused by used prices.

Personal contract purchases (PCPs) and other similar contracts have accelerated the proportion of new cars bought on finance from 45 per cent in 2006 to 75 per cent, and concern is growing over the market’s future.

A recent US report from the National Risk Committee highlighted the dangers of long-term finance deals should interest rates rise or used car prices fall. PCP deals rely on current used car prices to set the amount consumers pay at the end of their term – the Guaranteed Minimum Future Value (GMFV).

• How to cut your car service costs: cheaper repairs, MOTs and servicing

If used prices fall, the GMFV is weakened and there’s no incentive for buyers to pay the inflated rate to keep the car – further flooding the used market. Philip Nothard, from used price expert CAP, said: “Industry professionals are keeping a close eye on the PCP explosion to understand how much risk there is and what would happen if the economy slowed down. Trying to model the future value of a four-year finance deal on a three-year-old car is difficult – they’re projections at best. There’s a lot that the Financial Conduct Authority has overlooked.”

• New consumer ombudsman to handle car complaints

It’s a complicated system and jargon can leave consumers confused. Auto Express has already been contacted by owners asking for advice when they can’t keep up with monthly payments or need cheaper instalments. Nothard added: “Too many consumers are signing contracts they don’t understand.”

Joanne Lezemore, founder of advice service Consumer Genie, advised: “The most important thing when buying a car on finance is to understand what you’re committing to. Read the fine print, know the interest rate and make sure you can afford the payments.”

Now read our full guide to paying for your next car on finance.

Recommended

Killer drivers will face life sentences from 2021
Speed camera accident
Consumer news

Killer drivers will face life sentences from 2021

Government promises to introduce legislation to reform sentencing for drivers who cause death or serious injury next year
14 Sep 2020
Over half of drivers break 30mph limits
Increased speed limits helps to cut accidents
Consumer news

Over half of drivers break 30mph limits

Official figures show drivers are most likely to break 30mph limits, closely followed by 70mph motorway limits
9 Sep 2020
Driving licence validity extended for 11 months
News

Driving licence validity extended for 11 months

Move follows seven-month extension announced in June; photocard licences expiring between 1 February and 31 December 2020 get automatic 11-month exten…
1 Sep 2020
Private parking firms face Government crackdown
UK’s parking ticket lottery
Consumer news

Private parking firms face Government crackdown

New proposals will introduce a cap on fines, a 10-minute grace period, major and minor offences, plus increased maximum fines
1 Sep 2020

Most Popular

New 2021 BMW M3 launched with huge grille and 503bhp
BMW 3 Series M3 Coupe

New 2021 BMW M3 launched with huge grille and 503bhp

The new sixth-generation BMW M3 Competition saloon gets a 503bhp straight-six engine and four-wheel-drive
22 Sep 2020
Energy firms want the right to switch off electric cars charging at home
Electric cars

Energy firms want the right to switch off electric cars charging at home

New powers being sought to allow energy providers to turn off high-drain devices to manage electricity network
18 Sep 2020
New Honda Civic Type R 2020 review
Honda Civic Type R

New Honda Civic Type R 2020 review

We find out if the revised Honda Civic Type R can stay at the top of the hot hatch class
22 Sep 2020