Britain’s costly love affair with luxury cars

High-end motors are easy to acquire through canny financing, despite dire economic straits, report Noah Eastwood and Ben Butcher

Britain is officially getting poorer, but we are borrowing ever larger sums of money to drive around in luxury cars. The transformation of the UK’s roads has been clear for all to see. Cars have become bigger and glitzier, with the latest models seemingly hitting driveways instantly.

Mercedes-Benz, Audi, BMW and Land Rover now dominate streets. At the same time, affordable brands such as Ford, Vauxhall, Peugeot and Seat have recorded sales tumbling over the last decade. Ford discontinued its family friendly economic Fiesta last year despite selling 4.8m since 1976.

Sales of the car more recently had crumbled before it was axed to free up space on production lines of the new Explorer, an electric SUV.

Drivers have taken out ballooning loans, today worth over £17bn, to fund this seachange – despite growth of average earnings remaining sluggish.

In 2009, the average UK earner took home £435 a week and borrowed just under £12,550 to finance their vehicle.

Today, earnings are only £ 209 higher, but the average amount borrowed to pay for a car has more than doubled, rocketing to £25,566 in 2023, according to website The Car Expert.

Even as real wages lag behind inflation, cheap financing deals on rock-bottom interest have allowed countless drivers to get behind the wheel of flashy new cars.

Personal contract purchase ( PCP) allows motorists to pay just several hundred pounds a month to drive some of the smartest vehicles on the market. Most drivers signing a PCP will never own their cars and after three or so years they can trade up without ever having to pay much more money.

LUXURY CAR ‘OBSESSION’

There is a startling 267pc increase in Porsche’s share of the new car market in the UK when the years 2009 and 2022 are compared, according to Driver and Vehicle Licensing Agency figures. Land Rovers are up 80pc, while Lexus is selling 75pc better.

BMW and Mercedes are up 37pc and 35pc respectively, while Audis are doing 48pc better and now account for almost 7pc of all new car sales.

At the same time, brands that performed better when most drivers bought their cars outright in 2009 have lost significant ground.

Almost 233,000 Vauxhalls were registered in 2009 compared with only 81,873 in 2022, a decline of 57pc.

Meanwhile, just over 60,000 new Fiats were given new plates in 2009, while just 19,647 were registered in 2022, dropping 61pc.

Ford, Citroen and Subaru all lost around 50pc of their market share, while Peugeot and Renault lost 39pc.

MIDDLE MANAGERS’ EV PREFERENCE

Edmund King, AA president, says that the impact of electric vehicles (EVs) has played a significant role in transforming the car market and car financing. “There are a number of things at play here. One of them not to be overlooked in [the] financing of cars is the advent of electric vehicles.

“This is fairly radical. To some extent, the advent of electric vehicles has broken down some of the traditional brand loyalties,” he says.

“You’re getting people who would buy Mercedes, Audi etc who are now thinking about getting a Hyundai.”

He says that there are “incredibly good deals” available for EVs when purchased through a company car tax scheme or salary sacrifice, which allows drivers to pay for an electric car though before-tax earnings.

“Buying a luxury EV through salary sacrifice puts some of those luxury cars in the domain of lower middle management. Basically, because of these tax advantages, they can elevate themselves to much more luxurious, albeit electric vehicles.”

More than 54,000 new Teslas were registered in the UK last year, accounting for a 5.4pc share of the market.

Mr King says that for some households, having a newer more attractive car is just about keeping up appearances and that a PCP deal can be a way of easily achieving this.

“You do get the kind of neighbourhood effect if the cars in your street are upgraded, or if there are more electric vehicles in your street, you’ll see more people adapt to electric vehicles.

He says it’s “keeping up with the Joneses” and that people start to “think how could I do that [buy a nicer car] or maybe do that on a lease”.

He adds that growth of smaller microcar EVs, which are typically around £10,000 more expensive than petrol and diesel alternatives, has meant that cheap small cars have become harder to find.

Affordable cars such as the VW Beetle and the Mini were “small iconic vehicles that changed motoring”, he says.

“We still haven’t got that car [as] an electric car [we don’t have] ‘ the people’s car’. The irony is we still need those lower price cars at the bottom end with the cost of living crisis.”

‘FEELING OF OWNERSHIP’

Ian Plummer, commercial director at online car reseller Auto Trader, says that the new car market has been “growing massively” off the back of PCP in the last few decades. “The long-term trend has been that PCP has enabled more people

Weekly pay relative to financing

Number of weeks of average wages needed to pay off average financing scheme to access a higher quality [of car] and they are able to renew more frequently.

“The premium brands do very well in this market,” he says. “There’s a feeling when you have a PCP that you own the car. It’s outside your house and your name is on the documents. But you don’t own it.”

He says that the prevalence of PCP has “come down slightly in the last couple of years” but that drivers are showing no signs of trading down for more midrange vehicles or “downgrading”.

This is because opting for a PCP contract makes even top of the range vehicles affordable for many drivers, he says. “It’s often seen that finance is a way to afford a more expensive car. To get the car you want, finance has become a better way.

“But if they [drivers] can afford a nicer one and spend a lot of time in it, then they will look to stretch to a more premium product on a monthly payment. We all enjoy being able to afford a new car [and] our frequency of change [of vehicle] is very high in the UK.”

Just over half of new cars were financed in 2009. Since then a borrowing craze has taken off. The popularity of PCP has been behind the surge in the proportion of car buyers using financing, which reached an all-time high of 93pc of new cars bought in 2020.

The figure was down 10pc on that number in 2022 and was 78pc in the first half of this year – suggesting the debt bubble could be beginning to ease as many cut back on spending.

BOOM TO BUST

In a tightening economic climate, lenders look to offer drivers new deals in an increasingly cautious market.

The Finance and Leasing Association, the trade body for lenders, announced a 6pc decline in new car finance in July. The Society of Motor Manufacturers and Traders figures, meanwhile, recorded the worst August in over a decade for sales of new cars, with consumer demand dropping 8pc on the same time last year.

Stuart Masson, of The Car Expert, says: “August is generally the second- slowest month of the year, just above February, as both of those months lead into new number plate months in March and September.

“But private registrations were down 8pc year-on-year, a big swing.

“It could be a warning sign of the impact of the cost of living crunch on private new car purchases, but September will give us a much better indication.” Industry bosses still believe the UK’s appetite for new cars can defy the odds. Mike Hawes, chief executive of the SMMT, said that the new car market has experienced “consistent growth”.

Registrations of electric vehicles, in particular, have “increased significantly” in the last year, he noted. He says: “With benefits including a quiet driving experience, reduced emissions and potentially lower running costs, one in five cars registered in August was electric.

“Manufacturer investment is delivering ever-increasing model choice with enhanced range and September’s plate change month is offering consumers competitive deals. To accelerate demand still further, however, investment in infrastructure, incentives and clarity on future regulations and taxation is needed.”

PEOPLE ARE STILL GETTING BETTER CARS

Stephen Haddrill, director-general of the FLA, says drivers’ tastes are still shifting towards larger premium vehicles like SUVs.

He says: “Cars have changed [since 2009] and they have changed for the better. I mean [they are] a lot safer.

“The SUV market has taken off. But because people have decided, for all sorts of reasons, it suits them better. They can carry their kids around more easily.

“People are getting better cars. If they can afford it through a monthly contract, then why not?”

He says that PCP can include options such as voluntary termination, which allows borrowers to hand back their car usually after paying off half of its value.

“[A] PCP contract is a very useful contract for a lot of people. Generally, it’s an affordable means of acquiring a car. You’re seeing a shift into other [financing] products but I don’t think that’s a bubble deflation.

“There’s been a bit more competition in the market between the various forms of financing, HP [higher purchase], PCP and so on. It [financing] has dropped a little bit but we’re probably looking at it being fairly stable through the rest of the year.”

He says deals could continue to be spread over longer periods of time to maintain affordability.

Despite higher inflation, soaring cost of living, rent and mortgage payments, Mr Haddrill says “cars are one of the last things that people give up”.

‘If there are more electric vehicles in your street, more people will adapt to electric vehicles to keep up with the Joneses’