October 4, 2013 8:07 pm

Record credit levels drive UK car boom

New unregistered cars are stored in a compound in Kent, U.K©Bloomberg

The share of new cars being purchased with credit has hit a record high of 75 per cent, underscoring how cheap finance is fuelling booming sales and raising fresh questions about the consumer recovery.

Credit accounted for 74.5 per cent of new car purchases in the 12 months to August, a sharp rise on historic pre-recession levels of about 50 per cent, helping to push sales to levels not seen for five-and-a-half years.

UK car sales grew for the 19th month in a row to over 400,000 in September, -– the best month since March 2008 – according to figures released on Friday by the Society of Motor Manufacturers and Traders.

The jump in car financing reflects a rapid recovery in consumer credit, which is now growing at rates last seen in 2008. Non-credit card consumer lending grew 3.7 per cent in the year to August, Bank of England figures show, a growth rate that has been on a steady upward trend for over two years.

Lending growth remains lower than the 10 per cent plus rates of the 1990s and early 2000s and concerns about lending have not yet surfaced at the BoE’s Financial Policy Committee. But with incomes falling, it would not take much more borrowing for cars and other large household purchases to make policy makers worry that families were stretching themselves too far.

In the year to August, more than £11bn of credit was advanced to new car buyers, an increase of a third on a year earlier, according to data from the Finance & Leasing Association seen by the FT. The average loan was £14,622.

Other forms of finance such as unsecured personal loans, which are not collated by the FLA, are also being used to fund purchases, meaning the proportion of cars being bought using credit is probably even higher, officials at the trade association said.

The windfall from refund claims made against mis-sold payment protection policies, or PPIs, has also been cited by industry analysts as a factor, because the average payout of more than £2,700 can serve as a downpayment.

With high unemployment and sluggish growth in Italy, Spain and France dragging demand to levels not seen for two decades, car manufacturers have turned to the UK for salvation by offering bargain-basement finance deals through financing arms and banks.

“Manufacturers are desperate to shift cars . . . and credit is the mechanism through which they can do that,” said Paul Harrison, head of motor finance at the.

Almost every mainstream car brand is offering UK customers a new small hatchback for less than £100 a month, while ever-increasing numbers of dealers are offering zero-deposit deals secured to the vehicle.

Increasingly popular deals see drivers never actually own the vehicle, but merely rent it over a period of monthly payments before trading it in as a deposit on a new model.

Sales rising to above 2.4m cars a year would be signs of a bubble that would spook lenders, two FLA members told the Financial Times. Sales are expected to top 2.2m cars in 2013, according to industry forecasters.

“At some point we will start seeing interest rates going up, and so yes, we should be worried about this. Are these levels of finance really sustainable?,” said Anil Valsan, head of automotive at EY. “Manufacturers need to come up with other ways to keep sales going rather than finance.”

“The other big worry is that it isn’t just the volume brands, but the premium players are having to resort to some of these tactics,” said Mr Valsan.

Deloitte’s UK automotive head David Raistrick describes the market as one “that many have viewed as defying gravity over the past 12 months, and suggested cannot continue to do so indefinitely.”

Car executives and industry analysts have frequently cautioned on the sustainability of the growth, citing the high proportion of financing packages, large price discounts and so-called car dealer “dark arts” such as registering new vehicles to a non-existent buyer in order to sell them on soon as a lower-priced used car.

“It is unquestionable that finance is helping people to buy cars,” said Richard Lowe, head of retail & wholesale at Barclays. “It might not carry on exactly in this form forever, but the market evolves. Nothing is forever.”

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Letter in response to this article:

Do I still count as a credit customer after a brief flirtation? / From Mr Peter Whitehead

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