Motorists could be forced to default on car payments to save their homes, expert warns

Thousands of drivers could be forced to default on their car payments in order to save their mortgages during the cost of living crisis, experts have warned.

An estimated 90 per cent of car buyers in Britain finance their car using Personal Contract Payments, taking out a loan on a fraction of a car’s value and paying the loan back over a two-to-four-year period.

Borrowers then have the option to make a “balloon payment” at the end of the term to buy the car outright, however most opt to take on another PCP loan on a new car.

Stuart Masson, of adviser The Car Expert, warned that a “perfect storm” of high interest rates on mortgages and soaring utility bills could see the PCP bubble burst, leaving borrowers in a “mountain of debt” and considering abandoning their car to save their home.

Interest rates for PCPs are fixed for the duration of the term, but Mr Masson said the average interest rate on new car finance had already hit 10 per cent. “On used cars, you’re looking at 10-15 per cent or more for a lot of people,” he added.

He continued: “What the PCP has encouraged people to do is borrow more money on a more expensive car for the same monthly payment.

“The problem comes when the situation goes south – if you can't afford your monthly payment, with incomes being eaten away utility bills, you’re actually carrying a lot more debt than you probably were previously.”

‘The situation is only going to get worse’

Brian Gregory, of the Alliance of British Drivers trade body, said the cost of living crisis had left drivers “in an almost impossible position”. He added: “The situation is only going to get worse. Everything is getting more expensive and all of these things are feeding in to make everybody’s life more difficult.

“Certainly if you’ve got a PCP package, it’s going to make it much worse.”

There are no penalties for defaulting on PCP payments other than having to hand the car back, but the FLA warned some drivers would fail future affordability checks when applying for future loans.

Adrian Dally, FLA Director of Motor Finance & Strategy, said: “For most people, a car is a necessity, not a luxury, but the cost of living increase combined with a higher interest rate environment means household budgets will be under pressure, and inevitably some new customers won’t meet the criteria for a motor finance loan.”

Stefan Kleinekoort, a part-time mechanic, said he had traded in his PCP-financed BMW for a far cheaper Ford Fiesta, adding that he “couldn’t justify” the high cost.

Mr Kleinekoort, 27, paid £324 per month for 2020-era BMW on a 24-month lease that had an upfront payment of just under £4,000. He now pays £205 per month for the Fiesta.

“I used to feel like I needed a nice car for perception, but since the cost of living crisis and seeing many of my friends struggling financially - it just feels wholly inappropriate to justify the cost,” he said. “I have had a mortgage hike for my house since my five-year fixed rate ran out a couple of months ago and obviously, my energy bills have increased quite significantly.”

‘Increasing economic prudence’

Data from the Finance and Leasing Association showed 732,754 PCP loans were taken out on new cars. But figures from September showed new consumer car finance business had fallen by five per cent compared to last year.

Year-on-year sales of cars on PCP dipped by 13 per cent – from 201,692 to 175,727 – as of the last three months, forcing lenders to increasingly push older cars they otherwise would not have funded, or offer unconventional loans to keep customers on.

Ian Plummer, of car sales website Auto Trader, said an increasing number of drivers at the end of their term were “refinancing” the balloon payment – effectively taking out a second loan.

“So, rather than switching to a new vehicle, a growing number of people are choosing to stick with their existing car for longer,” Mr Plummer said. “This may well be a case of increasing economic prudence among motorists.”

Ford Credit, a lender, now offers drivers the option to take out a second loan to finance the balloon payment “until they are ready to buy it, trade it in for a new car or hand it back to the business”.

Carlos Treadway, of the lender, said: “With the cost of living crisis continuing to hit consumers from every angle, we expect flexible car finance to become all the more valuable for drivers over the coming months and possibly beyond.”

Meanwhile, Leaseloco, a lending comparison site, said traffic to its site had surged by 11 per cent in the last three months “due to car owners looking for cheaper alternatives to PCP finance”.