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May 5, 2017updated 27 Jan 2022 2:28pm

The UK car market is hugely dependent on motor finance

By GlobalData Financial Services

The new car market in the UK has shown phenomenal growth in recent years, but has become increasingly dependent on cheap credit to fuel its expansion.

Data from the Society of Motor Manufacturers and Traders (SMMT) shows that the number of new cars that were privately registered rose from 823,094 vehicles in 2011 to 1,206,250 in 2016, a 47 perecnt increase.

However, over the same period the value of motor finance deals arranged for the purchase of such vehicles almost tripled from £6.86bn in 2011 to £18.09bn in 2016, according to the Finance & Leasing Association (FLA).

Source: SMMT, FLA

 

While 63 percent of cars were bought using motor finance deals in 2011, by 2016 this had risen to 87 percent.

Manufacturers are now using competitively priced personal contract plans (PCPs) to promote consumer demand.

However, this rapid rate of growth is unlikely to be sustained.

A deteriorating economic outlook may lead to reduced consumer demand for new cars, and could prompt an increased risk of impairments on existing loans.

Furthermore, falling secondhand car prices will prompt many PCP users to return their cars at the end of their deals, thus leaving manufacturers to deal with unwanted stock.

So although the motor finance market has performed impressively, this has been achieved at the cost of elevated risk.

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