{"id":1254597,"date":"2023-07-18T14:00:21","date_gmt":"2023-07-18T13:00:21","guid":{"rendered":"https:\/\/www.businesstelegraph.co.uk\/will-high-interest-rates-burst-the-new-car-bubble-and-will-drivers-hand-back-keys\/"},"modified":"2023-07-18T14:00:21","modified_gmt":"2023-07-18T13:00:21","slug":"will-high-interest-rates-burst-the-new-car-bubble-and-will-drivers-hand-back-keys","status":"publish","type":"post","link":"https:\/\/www.businesstelegraph.co.uk\/will-high-interest-rates-burst-the-new-car-bubble-and-will-drivers-hand-back-keys\/","title":{"rendered":"Will high interest rates burst the new car bubble and will drivers hand back keys?"},"content":{"rendered":"<p> <script async src=\"\/\/pagead2.googlesyndication.com\/pagead\/js\/adsbygoogle.js\"><\/script>\r\n<!-- newscabal uk text -->\r\n<ins class=\"adsbygoogle\"\r\n     style=\"display:inline-block;width:728px;height:90px\"\r\n     data-ad-client=\"ca-pub-8162386273903324\"\r\n     data-ad-slot=\"3688094655\"><\/ins>\r\n<script>\r\n(adsbygoogle = window.adsbygoogle || []).push({});\r\n<\/script><br \/>\n<\/p>\n<div wp_automatic_readability=\"168.36893203883\">\n<p class=\"dcr-2pj5k3\">Britain\u2019s car buyers are a nation of borrowers: more than four in every five new cars bought by individuals in 2022 was paid for with borrowed money.<\/p>\n<p class=\"dcr-2pj5k3\">For more than a decade that borrowing, on attractive terms thanks to ultra-low interest rates, opened up the car market to people without much in the way of savings \u2013 allowing the Mondeo Man to upgrade to a Mercedes-Benz C-Class.<\/p>\n<p class=\"dcr-2pj5k3\">Soaring interest rates are changing the calculation for potential buyers. The Bank of England has raised its main interest rate 13 times from its all-time low in late 2021 to <a href=\"https:\/\/www.theguardian.com\/business\/2023\/jun\/22\/bank-of-england-raises-interest-rates-by-a-half-point-to-5\" data-link-name=\"in body link\">5% in June<\/a> and another hike is expected next month. The average annual rate paid by new car borrowers has doubled in the same period, to 8.4% in June, according to AutoTrader, an online car marketplace.<\/p>\n<p class=\"dcr-2pj5k3\">The number of cars bought on finance fell by 10% in May compared with the same month in 2022, according to the Finance and Leasing Association (FLA), a lobby group. A total of \u00a33.3bn was lent for 179,000 new and used purchases.<\/p>\n<p class=\"dcr-2pj5k3\">Adrian Dally, the FLA director of motor finance, said the decline in new car finance was \u201cmonetary policy in action\u201d.<\/p>\n<p class=\"dcr-2pj5k3\">\u201cThe intention of monetary policy is to make lending more expensive, and reduce the amount of lending,\u201d Dally said. \u201cFewer people will qualify for motor finance, and those who do will be paying a higher interest rate.\u201d<\/p>\n<p class=\"dcr-2pj5k3\">The key innovation in UK car finance over the past decade has been the personal contract purchase (PCP), a <a href=\"https:\/\/www.theguardian.com\/money\/2021\/nov\/29\/car-finance-deal-hp-pcp-cost\" data-link-name=\"in body link\">kind of hybrid of a loan and a rental<\/a>. The borrower does not own the car until the end of the term \u2013 <a href=\"https:\/\/www.theguardian.com\/money\/2017\/feb\/25\/secondhand-car-bargain-finance-leasing-deals\" data-link-name=\"in body link\">often about three years<\/a> \u2013 when they have the option of paying for the rest of the car with a \u201cballoon\u201d payment, handing it back, or entering another PCP deal.<\/p>\n<p class=\"dcr-2pj5k3\">During the era of unprecedented low interest rates British drivers upgraded their cars to newer models with dizzying frequency at the end of each contract period. The interest rate rise could herald a pause in that trend.<\/p>\n<aside class=\"dcr-nkrd5h\"><svg viewbox=\"4 4 24 16\" class=\"dcr-1ppocxd\"><path d=\"M9.2776 8H14.0473C13.4732 12.5489 12.9653 17.0095 12.7445 22H4C4.79495 17.142 6.4511 12.5489 9.2776 8ZM20.3852 8H25.0887C24.5808 12.5489 24.0067 17.0095 23.7859 22H15.0635C15.9688 17.142 17.5587 12.5489 20.3852 8Z\"\/><\/svg><\/p>\n<blockquote class=\"dcr-928886\"><p>Fewer people will qualify for motor finance, and those who do will be paying a higher interest rate<\/p><\/blockquote>\n<footer><cite class=\"dcr-1cf4ock\">Adrian Dally, FLA<\/cite><\/footer>\n<\/aside>\n<p class=\"dcr-2pj5k3\">Car payments can take up a significant chunk of monthly household budgets. AutoTrader\u2019s data suggests the average payment has risen to \u00a3259 \u2013 although that was an increase of only \u00a38 a month from a year earlier.<\/p>\n<p class=\"dcr-2pj5k3\">Yet it comes after several years of increases. Analysis of pricing for five models in November by Whatcar showed that monthly PCP payments had risen by an average of 23% over three years, driven by shortages and rising rates. The cost of a Ford Puma had risen from \u00a3257 a month three years ago to \u00a3315.<\/p>\n<figure id=\"47e6105a-8e40-4139-811a-8792f61cab77\" data-spacefinder-role=\"inline\" data-spacefinder-type=\"model.dotcomrendering.pageElements.ImageBlockElement\" class=\" dcr-173mewl\">\n<div id=\"img-2\" class=\"dcr-1t8m8f2\"><picture class=\"dcr-evn1e9\"><source  media=\"(min-width: 660px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 660px) and (min-resolution: 120dpi)\"\/><source  media=\"(min-width: 660px)\"\/><source  media=\"(min-width: 480px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 480px) and (min-resolution: 120dpi)\"\/><source  media=\"(min-width: 480px)\"\/><source  media=\"(min-width: 320px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 320px) and (min-resolution: 120dpi)\"\/><source  media=\"(min-width: 320px)\"\/><img decoding=\"async\" alt=\"New Fiat cars are seen on the forecourt of a car dealership in Dartford\" src=\"https:\/\/www.businesstelegraph.co.uk\/wp-content\/uploads\/2023\/07\/Will-high-interest-rates-burst-the-new-car-bubble-and.jpg\" width=\"445\" height=\"267.01598419540227\" loading=\"lazy\" class=\"dcr-evn1e9\"\/><\/picture><\/div><figcaption class=\"dcr-12s20i4\"><span class=\"dcr-17eagbs\"><svg width=\"18\" height=\"13\" viewbox=\"0 0 18 13\"><path d=\"M18 3.5v8l-1.5 1.5h-15l-1.5-1.5v-8l1.5-1.5h3.5l2-2h4l2 2h3.5l1.5 1.5zm-9 7.5c1.9 0 3.5-1.6 3.5-3.5s-1.6-3.5-3.5-3.5-3.5 1.6-3.5 3.5 1.6 3.5 3.5 3.5z\"\/><\/svg><\/span><span class=\"dcr-173h03c\">Some car buyers are trading down to less expensive models, the FLA\u2019s Adrian Dally said.<\/span> Photograph: Daniel Leal\/AFP\/Getty Images<\/figcaption><\/figure>\n<p class=\"dcr-2pj5k3\">Dally said the recent flatlining of the UK economy and the cost of living squeeze had led to more people trading down to less expensive models. Others have used savings built up during coronavirus pandemic lockdowns to pay the balloon payment to own the car \u2013 which can be half or more of the sticker value of a new car costing tens of thousands of pounds<strong> <\/strong>\u2013 and avoid further borrowing as interest rates rise. And \u201cthere will be more people handing those cars back\u201d, he said.<\/p>\n<p class=\"dcr-2pj5k3\">An \u00a38 monthly hike may be manageable, but it comes at a time when households are being squeezed on all sides by the cost of living crisis, with mortgage or rental payments eating up an increasing slice of household incomes. For those unlucky enough to be coming to the end of a fixed-rate mortgage term, the idea of spending \u00a3260 a month on a Ford Puma may gradually become less of a priority \u2013 particularly if it is a second car.<\/p>\n<p class=\"dcr-2pj5k3\">Economists expect a slowing UK economy growth to feed through to lower demand for new and used cars (although the latter tends to be a bit more resilient). Gabriella Dickens, an economist at Pantheon Macroeconomics, a consultancy, said she expected UK new car sales to remain between 10% and 15% lower than the average for the five years before the <a href=\"https:\/\/www.theguardian.com\/business\/2020\/apr\/08\/fears-of-crisis-in-uk-car-finance-market-as-owners-seek-payments-help\" data-link-name=\"in body link\">Covid-19 pandemic upended the market<\/a>.<\/p>\n<figure data-spacefinder-role=\"inline\" data-spacefinder-type=\"model.dotcomrendering.pageElements.NewsletterSignupBlockElement\" class=\" dcr-173mewl\" wp_automatic_readability=\"3.0580204778157\"><a data-ignore=\"global-link-styling\" href=\"#EmailSignup-skip-link-15\" class=\"dcr-15r7368\">skip past newsletter promotion<\/a><\/p>\n<aside aria-label=\"newsletter promotion\" class=\"dcr-124witz\" wp_automatic_readability=\"3.6679245283019\">\n<div class=\"dcr-10et71f\" wp_automatic_readability=\"7\">\n<p class=\"dcr-ohmn7a\">Sign up to <span>Business Today<\/span><\/p>\n<\/div>\n<p class=\"dcr-1613jw2\">Get set for the working day \u2013 we&#8217;ll point you to all the business news and analysis you need every morning<\/p>\n<p><gu-island name=\"SecureSignupIframe\" deferuntil=\"idle\" props=\"{&quot;name&quot;:&quot;Business Today&quot;,&quot;html&quot;:&quot;&lt;form id=\\&quot;secure-signup-business-today\\&quot;&gt;&lt;label class=\\&quot;email-signup-iframe-njjzu0\\&quot;&gt;&lt;div class=\\&quot;email-signup-iframe-de6my7\\&quot;&gt;Enter your email address &lt;\/div&gt;&lt;\/label&gt;&lt;div class=\\&quot;email-signup-iframe-17gkgdc\\&quot;&gt;&lt;div class=\\&quot;email-signup-iframe-lxzyg5\\&quot;&gt;&lt;label for=\\&quot;src-component-372967\\&quot; 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clientOnly&gt;<\/gu-island><span class=\"dcr-1u9nobt\"><strong>Privacy Notice: <\/strong>Newsletters may contain info about charities, online ads, and content funded by outside parties. For more information see our <a data-ignore=\"global-link-styling\" href=\"https:\/\/www.theguardian.com\/help\/privacy-policy\" rel=\"noreferrer\" class=\"dcr-1895p0o\">Privacy Policy<\/a>. We use Google reCaptcha to protect our website and the Google <a data-ignore=\"global-link-styling\" href=\"https:\/\/policies.google.com\/privacy\" rel=\"noreferrer\" class=\"dcr-1895p0o\">Privacy Policy<\/a> and <a data-ignore=\"global-link-styling\" href=\"https:\/\/policies.google.com\/terms\" rel=\"noreferrer\" class=\"dcr-1895p0o\">Terms of Service<\/a> apply.<\/span><\/aside>\n<p id=\"EmailSignup-skip-link-15\" tabindex=\"0\" aria-label=\"after newsletter promotion\" role=\"note\" class=\"dcr-15r7368\">after newsletter promotion<\/p>\n<\/figure>\n<aside class=\"dcr-nkrd5h\"><svg viewbox=\"4 4 24 16\" class=\"dcr-1ppocxd\"><path d=\"M9.2776 8H14.0473C13.4732 12.5489 12.9653 17.0095 12.7445 22H4C4.79495 17.142 6.4511 12.5489 9.2776 8ZM20.3852 8H25.0887C24.5808 12.5489 24.0067 17.0095 23.7859 22H15.0635C15.9688 17.142 17.5587 12.5489 20.3852 8Z\"\/><\/svg><\/p>\n<blockquote class=\"dcr-928886\"><p>The actual impact is pretty limited on a monthly payment basis<\/p><\/blockquote>\n<footer><cite class=\"dcr-1cf4ock\">Ian Plummer, AutoTrader<\/cite><\/footer>\n<\/aside>\n<p class=\"dcr-2pj5k3\">However, she acknowledged there is a \u201cweird situation\u201d in the car market because many buyers have been queueing for months, waiting for cars to become available during persistent <a href=\"https:\/\/www.theguardian.com\/business\/2023\/mar\/06\/uk-car-sales-rise-february-industry-recovers-chip-shortage\" data-link-name=\"in body link\">shortages of parts \u2013 most notably computer chips<\/a>. That has also fed through to strong demand for used cars.<\/p>\n<p class=\"dcr-2pj5k3\">The chief executive of a car dealership chain said their company was experiencing strong demand, but a lower proportion of buyers were borrowing money to fund new purchases. That was backed up by AutoTrader data, which showed that 77% of purchases in the first three months of 2023 used finance, down from 92% in 2021 and 84% in 2022.<\/p>\n<p class=\"dcr-2pj5k3\">In 2022, members of the FLA lent \u00a351bn to finance new car purchases. The group\u2019s members range from big banks such as Barclays and Black Horse, owned by Lloyds Banking Group\u2019s car finance arm, to the \u201ccaptive\u201d finance businesses owned by car companies such Ford, Mercedes-Benz and Stellantis.<\/p>\n<figure id=\"f5dc8276-ee94-4302-9a29-ebf226af268f\" data-spacefinder-role=\"inline\" data-spacefinder-type=\"model.dotcomrendering.pageElements.ImageBlockElement\" class=\" dcr-173mewl\">\n<div id=\"img-3\" class=\"dcr-1t8m8f2\"><picture class=\"dcr-evn1e9\"><source  media=\"(min-width: 660px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 660px) and (min-resolution: 120dpi)\"\/><source  media=\"(min-width: 660px)\"\/><source  media=\"(min-width: 480px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 480px) and (min-resolution: 120dpi)\"\/><source  media=\"(min-width: 480px)\"\/><source  media=\"(min-width: 320px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 320px) and (min-resolution: 120dpi)\"\/><source  media=\"(min-width: 320px)\"\/><img decoding=\"async\" alt=\"Secondhand cars for sale\" src=\"https:\/\/www.businesstelegraph.co.uk\/wp-content\/uploads\/2023\/07\/1690260878_292_Will-high-interest-rates-burst-the-new-car-bubble-and.jpg\" width=\"445\" height=\"267.07046714172606\" loading=\"lazy\" class=\"dcr-evn1e9\"\/><\/picture><\/div><figcaption class=\"dcr-12s20i4\"><span class=\"dcr-17eagbs\"><svg width=\"18\" height=\"13\" viewbox=\"0 0 18 13\"><path d=\"M18 3.5v8l-1.5 1.5h-15l-1.5-1.5v-8l1.5-1.5h3.5l2-2h4l2 2h3.5l1.5 1.5zm-9 7.5c1.9 0 3.5-1.6 3.5-3.5s-1.6-3.5-3.5-3.5-3.5 1.6-3.5 3.5 1.6 3.5 3.5 3.5z\"\/><\/svg><\/span><span class=\"dcr-173h03c\">Secondhand cars have been in demand as the costs of buying a new model rise.<\/span> Photograph: ZarkePix\/Alamy<\/figcaption><\/figure>\n<p class=\"dcr-2pj5k3\">Yet while the car finance market is large, it does not work in quite the same way as the much bigger mortgage sector: monthly payments do not increase in line with base rates. For drivers who are not well served by public transport options, that increase will be worth it when balanced against being unable to get to work or go to the shops.<\/p>\n<p class=\"dcr-2pj5k3\">\u201cThe actual impact is pretty limited on a monthly payment basis,\u201d the AutoTrader commercial director, Ian Plummer, said. \u201cFor most people it is absorbable.\u201d<\/p>\n<p class=\"dcr-2pj5k3\">Plummer added that pricing data suggested there is still demand for new cars, even if there will probably be an increase in cases of people unable to make payments.<\/p>\n<p class=\"dcr-2pj5k3\">A 5% bank rate has not been seen in the UK since April 2008, before the Bank of England slashed interest rates to try to revive the economy amid the global financial crisis. However, Plummer noted: \u201cThat was the kind of level that we were at in the 90s and the noughties\u201d, when car finance began its boom.<\/p>\n<p class=\"dcr-2pj5k3\">\u201cIt could put pressure on demand, but supply remains low,\u201d said Mike Allen, the head of research at Zeus Capital, an investment bank. \u201cWe don\u2019t see a crash, but we see a bit of pressure.\u201d<\/p>\n<p class=\"dcr-2pj5k3\">\u201cThe people that hold the risk are the finance houses,\u201d said Plummer. \u201cIf they get that wrong they\u2019re in trouble,\u201d he added, although for now they seem to have enough financial resilience to weather the interest rate rises<\/p>\n<\/div>\n<p><script async src=\"\/\/pagead2.googlesyndication.com\/pagead\/js\/adsbygoogle.js\"><\/script>\r\n<ins class=\"adsbygoogle\"\r\n     style=\"display:block; text-align:center;\"\r\n     data-ad-layout=\"in-article\"\r\n     data-ad-format=\"fluid\"\r\n     data-ad-client=\"ca-pub-8162386273903324\"\r\n     data-ad-slot=\"7859258044\"><\/ins>\r\n<script>\r\n     (adsbygoogle = window.adsbygoogle || []).push({});\r\n<\/script><br \/>\n<br \/><a href=\"https:\/\/www.theguardian.com\/business\/2023\/jul\/18\/high-interest-rates-new-car-lending\">READ SOURCE<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Britain\u2019s car buyers are a nation of borrowers: more than four in every five new cars bought by individuals in 2022 was paid for with borrowed money. For more than a decade that borrowing, on attractive terms thanks to ultra-low interest rates, opened up the car market to people without much in the way of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_oct_exclude_from_cache":false,"footnotes":""},"categories":[2],"tags":[],"class_list":["post-1254597","post","type-post","status-publish","format-standard","hentry","category-autos"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.9 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Will high interest rates burst the new car bubble and will drivers hand back keys? - Business Telegraph<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.theguardian.com\/business\/2023\/jul\/18\/high-interest-rates-new-car-lending\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will high interest rates burst the new car bubble and will drivers hand back keys? - Business Telegraph\" \/>\n<meta property=\"og:description\" content=\"Britain\u2019s car buyers are a nation of borrowers: more than four in every five new cars bought by individuals in 2022 was paid for with borrowed money. For more than a decade that borrowing, on attractive terms thanks to ultra-low interest rates, opened up the car market to people without much in the way of [&hellip;]\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.theguardian.com\/business\/2023\/jul\/18\/high-interest-rates-new-car-lending\" \/>\n<meta property=\"og:site_name\" content=\"Business Telegraph\" \/>\n<meta property=\"article:published_time\" content=\"2023-07-18T13:00:21+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.businesstelegraph.co.uk\/wp-content\/uploads\/2023\/07\/Will-high-interest-rates-burst-the-new-car-bubble-and.jpg\" \/>\n<meta name=\"author\" content=\"businesstelegraph\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"businesstelegraph\" \/>\n\t<meta name=\"twitter:label2\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.theguardian.com\/business\/2023\/jul\/18\/high-interest-rates-new-car-lending#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.businesstelegraph.co.uk\/will-high-interest-rates-burst-the-new-car-bubble-and-will-drivers-hand-back-keys\/\"},\"author\":{\"name\":\"businesstelegraph\",\"@id\":\"https:\/\/www.businesstelegraph.co.uk\/#\/schema\/person\/0a3a6a0f58402f1f2af94e02d0987b78\"},\"headline\":\"Will high interest rates burst the new car bubble and will drivers hand back keys?\",\"datePublished\":\"2023-07-18T13:00:21+00:00\",\"dateModified\":\"2023-07-18T13:00:21+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.businesstelegraph.co.uk\/will-high-interest-rates-burst-the-new-car-bubble-and-will-drivers-hand-back-keys\/\"},\"wordCount\":1220,\"publisher\":{\"@id\":\"https:\/\/www.businesstelegraph.co.uk\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.theguardian.com\/business\/2023\/jul\/18\/high-interest-rates-new-car-lending#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.businesstelegraph.co.uk\/wp-content\/uploads\/2023\/07\/Will-high-interest-rates-burst-the-new-car-bubble-and.jpg\",\"articleSection\":[\"autos\"],\"inLanguage\":\"en-GB\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.businesstelegraph.co.uk\/will-high-interest-rates-burst-the-new-car-bubble-and-will-drivers-hand-back-keys\/\",\"url\":\"https:\/\/www.theguardian.com\/business\/2023\/jul\/18\/high-interest-rates-new-car-lending\",\"name\":\"Will high interest rates burst the new car bubble and will drivers hand back keys? 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