The private new car market in the UK has shown phenomenal growth in recent years, but has become increasingly dependent upon the availability of 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, equating to a 47% 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). Consequently, while 63% of privately bought cars were acquired using motor finance deals in 2011, by 2016 this had risen to 87%.
The UK car market has therefore become extremely reliant upon finance deals, with manufacturers using competitively priced personal contract plans (PCPs) to promote consumer demand for their products.
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.
By Daoud Fakhri, Prinicipal Retail Banking Analyst