Car loan payments forced up as price of second-hand vehicles falls

MOTORISTS are facing more expensive car loans as companies battle a drop in the price of secondhand vehicles.

Car sellers are hiking monthly payments to make up for the loss in value of the vehicles returned to them at the end of the deal.

It comes amid growing fears that too many cars are being bought on credit, creating a dangerous debt boom.

Bank of England agents have been investigating, after warning the industry was vulnerable to shocks. Around two-thirds of private new car buyers do so through personal contract purchase (PCP) deals – usually from the car makers.

They make monthly payments for a fixed period of time after which they can either give the car back or buy it. The price for buying the car is agreed at the outset based on the predicted value of the car in the second-hand market.

But experts say most drivers choose to ‘flip’ to another deal to buy a newer car. This leaves the car company with a loss if the value of the second-hand car being returned fell more sharply than expected.

Experts say newer used cars are losing value faster than ever, with a vehicle under two-and-a-half years old now worth 57.6 per cent of its original value, down from 61.1 per cent in 2014. The fall is expected to continue as more and more cars come off three-year credit deals.

In April, the Financial Conduct Authority launched a probe into the car finance market over concerns about a ‘lack of transparency, potential conflicts of interest and irresponsible lending’.