‘Explosion’ in finance on new cars could spell trouble for used market

Industry experts are warning buyers of the “explosion” of car finance and potential problems caused by used prices.

Personal contract purchases (PCPs) and other similar contracts have accelerated the proportion of new cars bought on finance from 45 per cent in 2006 to 75 per cent, and concern is growing over the market’s future.

A recent US report from the National Risk Committee highlighted the dangers of long-term finance deals should interest rates rise or used car prices fall. PCP deals rely on current used car prices to set the amount consumers pay at the end of their term – the Guaranteed Minimum Future Value (GMFV).

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If used prices fall, the GMFV is weakened and there’s no incentive for buyers to pay the inflated rate to keep the car – further flooding the used market. Philip Nothard, from used price expert CAP, said: “Industry professionals are keeping a close eye on the PCP explosion to understand how much risk there is and what would happen if the economy slowed down. Trying to model the future value of a four-year finance deal on a three-year-old car is difficult – they’re projections at best. There’s a lot that the Financial Conduct Authority has overlooked.”

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It’s a complicated system and jargon can leave consumers confused. Auto Express has already been contacted by owners asking for advice when they can’t keep up with monthly payments or need cheaper instalments. Nothard added: “Too many consumers are signing contracts they don’t understand.”

Joanne Lezemore, founder of advice service Consumer Genie, advised: “The most important thing when buying a car on finance is to understand what you’re committing to. Read the fine print, know the interest rate and make sure you can afford the payments.”

Now read our full guide to paying for your next car on finance.