Car finance is big news and big business at the moment, with 80 per cent of new cars bought on some form of credit. But new research has suggests that Britons are risking a debt crisis by spending more than they can afford to get the latest models.
A study of spending habits across the country found that the average buyer is spending £1,000 a year more than they can comfortably afford on car payments and many admit that any unexpected bill would leave them struggling.
Advice on exactly how much of your income you can safely spend on car finance varies but most experts agree that buyers shouldn’t spend more than 20-25 per cent of their monthly earnings.
A survey of drivers, however, shows that the average Briton financing a new car spends 27.5 per cent of their income. Based on the average income and cost of a new car, that’s £1,154.37 a year more than what is deemed affordable.
There are wide regional variations, with those in the West Midlands budgeting wisely and spending 22.3 per cent of their income while buyers in Northern Ireland hand over nearly 40 per cent (£3,429.59 more than recommended).
Tempting dealership offers and the lure of a new, high-spec model could be behind Britons’ willingness to overspend, with nearly a third admitting to letting their emotions get the better of them at purchase time.
“A car is clearly a very personal purchase,” says Paul Brown, MD of Cars on Demand, which commissioned the study, “and it’s interesting to see how much more we’re willing to spend on a new one. It’s one of the biggest purchases we’ll make, so it’s perhaps no wonder we want to invest in a good one.”
That might be fine when everything is going smoothly, with most buyers manage to cover the costs of car ownership but almost half (42.6 per cent) of those asked said that the amount they paid on finance meant they would struggle to pay for any unexpected repairs.
There are also growing concerns that as living costs and interest rates begin to rise more buyers may struggle to afford their credit agreements, raising the spectre of rising defaults which could affect the banking sector in the same way the sub-prime mortgage problems that sparked a global financial crisis.