Car loan payments forced up as price of second-hand vehicles falls: Sellers hike costs to make up for loss in value of vehicles when they are returned

  • Drivers face expensive loans as firms battle a drop in price of second-hand cars
  • Sellers are now hiking monthly payments to replace the loss in value of vehicles
  • Fears suggest that too many cars are being bought by customers using credit 

By Rachel Millard, City Correspondent For The Daily Mail

Published: | Updated:

Motorists are facing more expensive car loans as companies battle a drop in the price of second-hand vehicles.

Car sellers have been hiking monthly payments to try and replace the loss in value of cars returned to them at the end of the deal.

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

Bank of England agents have been investigating, after warning the industry was vulnerable to shocks.

Motorists are facing more expensive car loans as companies battle a drop in the price of second-hand vehicles (stock photo) 

Motorists are facing more expensive car loans as companies battle a drop in the price of second-hand vehicles (stock photo) 

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 finance deal to buy a newer, better car.

This can leave the car company with a loss if the value of the second-hand car being returned has fallen 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 reportedly now worth 57.6 pc of its original value, down from 61.1pc in 2014. The fall is expected to continue as more and more cars come off three-year credit deals.

Bank of England agents said this month car manufacturers' were also under pressure from the fall in the pound.

Sellers have been hiking monthly payments to try and replace the loss in value of cars returned to them

Sellers have been hiking monthly payments to try and replace the loss in value of cars returned to them

They added: 'Increases in the sterling cost of new cars and decreases in the expected future residual values of many used cars had put some upward pressure on monthly finance payments on Personal Contract Purchase (PCP) plans.

'Car companies had sought to offset this in a number of ways, including increasing the length of PCP contracts.

'In addition, there had been an increase in the availability of Personal Contract Hire plans (long-term rental agreements where the customer does not have the option to buy the car), which tend to have slightly lower monthly payments.'

According to recent figures from the Finance and Leasing Association, reported yesterday on the Financial Times, 86.5pc of new cars were bought using credit, amounting to £18.6bn of borrowing.

Earlier this year the Mail told how mortgage brokers have reported an increase in the number of clients who are unable to buy the house they want because they are making monthly payments on one or sometimes two cars.

The Bank of England has warned that the popularity of car finance deals has helped push up household debt at the fastest pace since before the financial crisis.

The Financial Conduct Authority launched a probe in April into the UK car finance market over concerns about a 'lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry'. 

 

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