Drivers default on car loans to pay mortgage
Cost of living crisis could force motorists to give up their vehicle in order to save their homes
THOUSANDS of drivers could be forced to default on their car payments to save their mortgage during the cost of living crisis, experts have said.
An estimated 90per cent of car buyers in Britain finance their vehicle with Personal Contract Payments (PCP) – taking a loan on part of the value and paying it back over two to four years.
Borrowers then have the option to make a “balloon payment” at the end of the term to buy the car outright. Most opt to take on another PCP loan on a new car. However, Start Masson, of The Car Expert advice website, has warned that a “perfect storm” of high interest rates on mortgages and soaring utility bills could burst the PCP bubble, leaving borrowers in a “mountain of debt” and forced to abandon their car to save their home.
Interest rates for PCPS are fixed for the duration of the term, but Mr Masson said the average interest rate on new car finance had already hit 10per cent. “On used cars, you’re looking at 10-15per cent or more for a lot of people,” he added. “What the PCP has encouraged people to do is borrow more money on a more expensive car for the same monthly payment.
“The problem comes when the situation goes south – if you can’t afford your monthly payment. With incomes being eaten away and utility bills, you’re actually carrying a lot more debt than you probably were previously.”
Brian Gregory, of the Alliance of British Drivers trade body, said the cost of living squeeze has left drivers “in an almost impossible position”. He added: “The situation is going to get worse. Everything is getting more expensive and all of these things are feeding in to make everybody’s life more difficult. Certainly if you’ve got a PCP package, it’s going to make it much worse.”
There are no penalties for defaulting on PCP payments but the Finance and Leasing Association (FLA) warned some drivers would fail future affordability checks when applying for loans.
Adrian Dally, of the association, said: “For most people, a car is a necessity, not a luxury but the cost of living increase combined with higher interest rates means household budgets will be under pressure and, inevitably, some new customers won’t meet the criteria for a motor finance loan.”
Stefan Kleinekoort, 27, a part-time mechanic, traded in his Pcp-financed BMW for a Ford Fiesta, saying he “couldn’t justify” the cost. He paid £324 a month for the 2020 BMW on a 24-month lease that had an upfront payment of just under £4,000. He now pays £205 per month for the Fiesta.
“I used to feel like I needed a nice car for perception but, seeing many of my friends struggling financially, it just feels wholly inappropriate,” he said. “I have had a mortgage hike for my house since my five-year fixed rate ran out a couple of months ago and my energy bills have increased quite significantly.”
FLA figures from September show that new consumer car finance business had fallen by 5 per cent compared to last year.
Over the past three months, sales of cars on PCP have dipped by 13 per cent – from 201,692 to 175,727 – compared with last year, forcing lenders to finance older cars that they otherwise would not have funded or offer more unconventional loans to keep customers on.
Ian Plummer, of Auto Trader, said more drivers at the end of PCP terms are “refinancing” the balloon payment – effectively taking out a second loan.
“Rather than switch to a new vehicle a growing number are choosing to stick with their existing car for longer,” he said.
Lender Ford Credit now offers drivers the option of a second loan to finance the balloon payment “until they are ready to buy it, trade it in for a new car or hand it back to the business”. Carlos Treadway, its chief executive, said: “We expect flexible car finance to become all the more valuable for drivers over coming months.”
Leaseloco, a comparison website, reported an 11 per cent surge in inquiries over the past three months as car owners look for cheaper alternatives.