Consumers are borrowing over ?100 million per day to finance new cars according to the latest figures from the Finance and Leasing Association (FLA).
Consumers borrowed a total of ?3.17 billion in May to buy new and used cars, representing a year-on-year increase of 13 per cent compared to May 2017.
During May, 209,547 cars were bought by consumers on credit, with drivers putting more than ?15,000 on credit on average.
In the twelve to months to May, ?35.7billion of credit was extended to buy almost 2.4million cars. This equates to an average of ?15,000 of debt taken on for each car purchase.
Despite fears of a credit boom for car purchase, the FLA said that the surge in cars bought on credit is simply in line with rising demand for new car purchases.
They said that car finance in the new car market fell in the first three months of the year, and recovered in April and May, adding that almost nine in ten private new car sales were bought on finance in the year to May, and that this was unchanged from the same period to April.
However, the Financial Conduct Authority (FCA) feel that some motor firms are incentivising staff with sales commission to push unaffordable repayment plans with high interest rates to customers.
The FCA has banned 38 car dealers from offering car finance so far this year.
The majority of new car ‘buyers’ actually rent their vehicles through personal contract plans – or PCPs, under which the car buyer puts down a deposit of around ten per cent of the car’s price and makes a monthly payment to rent it for two or three years.
At the end of the contract the renter has the choice of either returning the vehicle or buying it. However, experts say most choose to ‘flip’ to another finance deal on a new car.
Experts have also warned that these finance deals – which typically charge interest of between 4 per cent and 7 per cent – are usually a more expensive way of buying a car than taking out a personal loan and purchasing the car outright.
Motorists can be hit with extra charges, including penalties of up to 30p a mile for exceeding an agreed mileage limit when the finance deal expires.
And those who fail to meet their monthly repayments will damage their credit rating, making it harder for them to get a mortgage or a loan.