High value car loans to younger borrowers cause hardship. They increase the likelihood that people end up using high cost lenders.
Car finance is booming. £30bn was advanced in 2016; with loans doubling in five years. It is almost as easy to walk away from the forecourt with a brand-new BMW as it is to get a contract for a new iPhone. Only car finance is proving costlier.
Ian Gordon, analyst at Investec says “The concern that the Bank of England specifically talks about is car finance given it’s the fastest growing part of consumer credit”
Each month retailCURe looks at 100s of loan applications and trends are emerging, providing evidence that some car finance deals have a negative effect on members’ well-being. Lenders need to carry out more stringent affordability checks to protect vulnerable consumers.
We see borrowers in their 20s and 30s with reasonable incomes taking home £1,250 to £1,500. Loans in the region of £15k - £25k tend to have monthly repayments of around £220, although we’ve seen monthly repayments as high as £350.
Given repayments often take more than £1 in every £5 earned, it is no surprise that borrowers find themselves reaching for credit cards to make ends meet. Those affected are more likely to be in rented accommodation, so pay a higher cost to keep a roof over their head and have less disposable income.
Once the loan repayments begin to bite, borrowers often take out one or two high street credit cards with £1,500 - £2,500 available to spend. These quickly (b)reach their limits, indicating that they are being used to meet day to day expenses.
A couple of subprime credit cards might follow for around £150 - £500 each. These quickly reach capacity. Payday loans often follow. We’ve seen cases where, shortly after a series of payday advances, car payments are missed and the vehicle is handed back.
retailCURe is about more than saving and borrowing. The Credit Union has a legal duty to promote financial well-being. We are keen to work other organisations that support the financially fragile so we can identify where policy can be developed to prevent these problems from occurring in the first place.
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