UK car sales roared to their highest level since 2007 last year, as abundant cheap credit and improved consumer confidence made Britain’s car market the most buoyant in Europe.

The 10.5 per cent increase in vehicles sold last year epitomises the surprise rebound in the economy, as households have confounded expectations by opening their wallets even as incomes remain under pressure.

Official figures show that households felt sufficiently confident to allow their savings to fall as a share of income in the year to the third quarter, when household spending accounted for five-sixths of total economic growth.

Rising demand for new vehicles has become one of the more visible signs of the resurgent UK economy, as UK buyers bought more than 2.26m new cars in 2013.

Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, the industry body that collates the sales data, predicted the UK market, Europe’s second-largest by sales after Germany, would register moderate and stable growth in 2014 .

Last year’s total is only 6 per cent lower than 2007’s 2.4m sales, and 300,000 cars fewer than the highest-ever total seen in 2003 as the UK continued to outperform European sales, which fell by at least 2 per cent.

The rebound in car sales mirrors consumption trends in the UK. As new cars were being driven out of showrooms at almost pre-recession levels, the national accounts show real household spending only 1.5 per cent lower in the third quarter than at the peak.

With business investment and exports still in the doldrums, the wider economy remains 2 per cent below the level reached in early 2008.

Spain was the only other major European market to see an increase in sales last year thanks to a scrappage scheme, while France, Germany and Italy all saw sales fall as the impact of the financial crisis dragged on.

The UK’s boom has been led by private, individual buyers, which account for half of the market and bought about 15 per cent more cars last year than in 2012. More than one in seven cars sold in the UK last year were made here, according to SMMT – a higher proportion than before the financial crisis.

Record levels of credit and windfalls from refunds for mis-sold payment protection insurance have helped fuel the rise in car sales. Roughly three of every four cars bought by individuals are bought on credit , up from one in two before the recession, as increasing numbers of buyers take advantage of rock-bottom interest rates.

PPI refunds, with an average payout of about £3,000, are commonly used as a downpayment on a new vehicle, analysts and company executives say. “The UK market has been buoyant through 2013, leading Europe in terms of sales but creating a fiercely competitive sales environment as a result,” said Mark Ovenden, chairman of Ford Britain, the country’s most popular car brand by sales and manufacturer of the Fiesta, the UK’s best-selling car.

Mass-market carmakers that are struggling to sell vehicles elsewhere in Europe amid the worst sales slump on the continent for 20 years have also helped to tempt buyers back to the market through highly-competitive sales offers.

British dealerships are awash with record levels of incentives and discounts, such as free insurance or servicing for as much as five years, or interest-free repayment packages.

Additional reporting by Chris Giles.

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Letters in response to this report:

Try asking the buyers why they bought a new car recently / From Mr Stephen Rodney

A car finance plan in the making / From Mr Trevor Griffiths

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