High-cost car finance has become a growing concern in the UK economy over the past few years. Car finance, in general, has become a popular method for consumers to purchase cars, but it has also become a significant burden for some households. In this article, we will explore the impact of high-cost car finance on the UK economy.
High-cost car finance refers to car loans with high-interest rates, typically offered to consumers with poor credit history or low income. As an example, Moneybarn typically offer loans at over 30% APR. However, if the loan was lent to individuals who could not afford it, then they can make a claim against Moneybarn and get a refund.
These loans may come in the form of hire purchase agreements, personal contract purchase (PCP), or personal contract hire (PCH) agreements. The monthly payments for these agreements may appear low, but the total cost of the loan can be significantly higher than the purchase price of the car.
The high-cost car finance market has grown rapidly in the UK, with an estimated 91% of new car purchases being financed in some way. This growth is partly due to the availability of credit and the low-interest rates on offer. However, it is also due to the aggressive sales tactics used by car dealerships and finance companies.
The impact of high-cost car finance on the UK economy is significant. Firstly, it has contributed to the increasing levels of household debt in the country. The average household debt in the UK has reached £60,363, with car finance being a significant contributor. This level of debt can lead to financial stress and impact the overall financial stability of households.
Secondly, high-cost car finance can lead to a decrease in consumer spending. As more households become burdened with debt, they are likely to reduce their spending on discretionary items. This reduction in consumer spending can have a negative impact on the overall economy, particularly in the retail and leisure sectors.
Thirdly, high-cost car finance has the potential to create a subprime lending market in the UK. Subprime lending refers to lending to consumers with poor credit history or low income. This market can be risky for both consumers and lenders, as it can lead to high default rates and financial instability.
Fourthly, the high cost of car finance can impact the car industry in the UK. The UK automotive industry is a significant contributor to the country’s economy, providing employment to over 160,000 people and contributing over £18 billion in turnover. The high cost of car finance can reduce demand for new cars, which can impact the overall revenue of the industry and lead to job losses.
Finally, high-cost car finance can impact the environment. PCP agreements, in particular, encourage consumers to upgrade their cars every few years, leading to increased emissions and waste. The increasing popularity of electric vehicles has not yet had a significant impact on the high-cost car finance market, which is still dominated by petrol and diesel cars.
The UK government has recognized the impact of high-cost car finance on the economy and has taken steps to address the issue. In 2019, the Financial Conduct Authority (FCA) introduced new rules to improve transparency in the car finance market. The rules require lenders to provide more detailed information to consumers about the cost of their loans and the potential impact on their finances. If lenders break these rules, then borrowers can make a car finance claim and get a refund.
The FCA also introduced a price cap on rent-to-own agreements, which are similar to high-cost car finance agreements. The price cap limits the amount that lenders can charge for credit, reducing the overall cost of the loan for consumers.
Furthermore, the government has introduced measures to promote the use of electric vehicles, which could help reduce the impact of high-cost car finance on the environment. These measures include grants for electric vehicles, tax incentives for electric company cars, and funding for charging infrastructure.
In conclusion, high-cost car finance has a significant impact on the UK economy. It has contributed to increasing levels of household debt, reduced consumer spending, created a subprime lending market, impacted the car industry, and impacted