Credit bubble fears as drivers borrow £32bn to buy new cars

BRITONS borrowed nearly £32billion to buy cars last year, fuelling fears of another reckless debt binge.

Figures released yesterday showed £31.9 billion of consumer car finance was issued in the year to January – an 11 per cent increase on the previous year.

More than 6,300 new and secondhand cars were snapped up on credit every day – or 2.3million across the year. Businesses took out a further £9.3billion in finance to buy company cars, a rise of four per cent.

Borrowing on credit cards and personal loans also surged by eight per cent to £45.2million, according to figures from the Finance and Leasing Association (FLA).

The FLA, whose members include the finance arms of car giants as well as banks and building societies, said the borrowing boom showed the ‘robust’ confidence of households. But former pensions minister Baroness Altmann described the figures yesterday as ‘astonishing’ and warned that the borrowing binge could ‘end in tears’.

The figures emerged days after the independent Office for Budget Responsibility warned that the UK economy is being kept afloat by an unsustainable spending spree driven by credit.

Record low interest rates are enabling car manufacturers to offer increasingly cheap deals, which are proving impossible to resist for many households.

Around 85 per cent of private cars were bought last year through some kind of finance deal.

The majority of new car ‘buyers’ actually rent their vehicles through personal contract plans (PCPs), which are typically offered by the finance arms of major car manufacturers. They involve drivers making monthly payments to rent the car for two or three years before having the option to buy it outright. However, most choose to ‘flip’ to another finance deal on a new car. Experts warn that these deals – which typically charge interest of between 4 per cent and 7 per cent – are usually a more expensive way of buying a car than taking out a loan.

Baroness Altmann said: ‘This is an astonishing increase in borrowing could end in tears.

‘There are huge dangers of relying on ever-increasing consumer debt to fuel your economy. If your economy is built on debt and you’re relying on more debt to boost growth then you’re heading for a crash.

‘This is exactly what happened in the early noughties – Gordon Brown’s idea was that borrowing creates its own growth. He was relaxed about not saving and encouraging irresponsible consumer debt.

‘This was all fine until the crash. We’re getting back to those levels again.’

The Bank of England has singled out the car finance boom has as one of the main reasons household borrowing – excluding mortgages – is rising at the fastest pace in 11 years.

Wes Streeting, a Labour member of the Commons Treasury Committee, added: ‘We are storing up serious problems for the economy by relying on consumer credit to drive growth. This is good news for people who sell cars for a living. Whether people can afford these loans is the bigger question.’

Peter Tutton, head of policy at the Step-Change debt charity, said: ‘We are now almost back at the 2008 peak for outstanding debt on credit cards, personal loans and other forms of credit. Car finance was a part of the consumer debt problems that built up before the crash, so while it provides a useful and necessary service for consumers, it is important to ensure that lending is responsible and sustainable.’

Tamzen Isacsson, of the Society of Motor Manufacturers and Traders, added: ‘Finance offers an affordable and flexible way for motorists to purchase a new car, with fixed monthly payments and APR that are generally lower than for personal loans.

‘Car finance is governed by very strict rules, and anyone taking out a package will have the terms and conditions explained to them by the dealer and in writing.

‘As with any major purchase, customers are advised to do their own research and to make sure that they are getting the best deal on offer, and one that is within their budget.’

‘Storing up problems’