Car Finance Concerns

Given that the cost of cars has risen by a significant amount in the past five years, it is perhaps surprising that there are so many new drivers on the road. There is always going to be a market for used cars but there have also been a high number of motorists buying new or nearly cars, and the reason for this is mainly down to the fact that there has been a rise in the car finance options in the United Kingdom.

Ask any motorist about the costs of driving and they will tell you that it is highly expensive. Owning a car sees many people paying a lot of money in fuel to ensure their car operates, insurance costs can be expensive and servicing a car on a regular basis is another issue that people have to contend with. This is why you will see many motorists looking at the cost of buying and then owning a car and think that it is not for them. Then again, the huge benefits that come from having access to a car are clearly important too and this has been a factor in the volume of motorists on the road but it does look as though major bodies are now starting to take a significant interest in car finance.

FCA wants to examine Car Finance deals

This may be fuelled by the fact that £31.6bn was borrowed in the United Kingdom in 2016, a figure which has alarmed the Bank of England and the Financial Conduct Authority, the FCA. However, the FCA has also stated that they have genuine concerns regarding the finance deals too. With two of the most important financial institutions in the country developing concerns about the way people pay for cars and how these deals are done, there are a growing number of calls to investigate the car finance industry to make sure that everything is above board. This will inevitably lead to individuals all around the country developing concerns and getting nervous over their own finance agreements and arrangements.

Up until around 12 years ago, the most common ways for people to obtain finance in order to buy a car was through a bank offering them a car loan or taking out a Hire Purchase contract, a HP contract, which allowed them to pay up the cost of the car, plus fees and interest, over a number of years. However, in 2016, it turns out that 82% of new car finance deals were classed as Personal Contract Purchase deals, or PCP as they are commonly known as. This is a form of lending that was extremely popular in the United States of America and like so many things that become popular in the US; it has been brought over here and has been taken up by many people.

There are three main options with a PCP deal

The PCP deal sees the motorist renting the vehicle over a period of three years rather than owning the car outright. Once the three year period has come to an end, the motorist has three options:

  • Hand the vehicle back
  • Roll over any residual value on the car to a new PCP deal for a new vehicle
  • Purchase the car for the residual value, after depreciation, and this has been referred to as a balloon payment

Anyone who has ever wondered why there appears to be so many new cars on the road should consider this style of payment as a big factor in how so many motorists can afford a new vehicle. Anything which helps people to pay for something expensive in monthly payments as opposed to a one-off amount is always going to be a viable and attractive option for many people, so you can see why these deals have been taken to strongly in the UK. Motorists love driving new vehicles and this form of payment plan has had a big impact on being able to afford a new vehicle on a regular basis.

In many ways, similarities are being drawn with the mobile phone market. Mobile phone users are at ease with paying a monthly cost for their phone and then upgrading every 18 or 24 months. In this regard, this style of deal, which is also more affordable than HP costs if you aren’t looking to own the vehicle, is going to be immensely popular.

There are problems with this style of deal though and this is why many people need to fully consider their options. It may be that other forms of finance, such as guarantor loans, may be better for a motorists individual needs. There is no right or wrong answer that suits everyone; individual motorists need to consider their own finances.

If you’re looking to get on the road, make sure you choose the car finance option that is right for you.

Andrew Reilly is a freelance writer with a focus on news stories and consumer interest articles. He has been writing professionally for 9 years but has been writing for as long as he can care to remember. When Andrew isn’t sat behind a laptop or researching a story, he will be found watching a gig or a game of football.

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