Millions of drivers who have bought cars on credit are struggling to afford the payments, research shows.
Figures from the RAC reveal that a tenth of motorists are feeling the financial strain of keeping up with their car loan bills.
Almost half of these are cutting back on spending as a result, according to the research. Others have been hit with penalties for handing back their keys early because they cannot cope with the costs.
Experts said many customers were sold deals they do not fully understand, fuelling fears a soaring number of motorists could default on debts and trigger a financial crisis.
Millions of drivers who have bought cars on credit are struggling to afford the payments, research shows (file photo)
Fears of a debt bubble in car financing have risen as showrooms allow motorists with poor credit histories to get loans and drive off with brand new vehicles.
Rachel Reeves, chairman of the Commons business, energy and industrial strategy committee, said: ‘Much of the worrying rise in consumer debt is fuelled by car finance deals.
‘Many people are struggling to pay off these loans and are at risk of being driven deeper into debt. The easy car finance offered by some lenders could be a ticking timebomb for the wider economy.
‘The Financial Conduct Authority should look at strengthening affordability rules on car finance deals.’
Martyn James, of consumer website Resolver, said: ‘We have a situation where complex credit agreements are being sold by car salesmen who are not financial experts.
‘If people start defaulting on these loans en masse this could have an impact on the economy.’
About 70,000 new cars are bought each month on finance, according to the Finance and Leasing Association. In the year to November 2017 nearly a million cars were bought using finance deals, with customers amassing debts of more than £18billion.
The Daily Mail has revealed in some cases customers who are unemployed or on low wages or have bad credit histories are being offered new vehicles without any down-payment.
Figures from the RAC reveal that a tenth of motorists are feeling the financial strain of keeping up with their car loan bills (file photo)
Almost nine in ten of all cars bought in the UK on finance are sold through these deals known as personal contract purchases (PCPs). Customers pay a chunk of the car’s value over three to five years. They then pay a lump sum at the end of the deal if they want to keep the car.
This payment is based on its projected value at the start of the deal, but often can be more than the vehicle is eventually worth. Many drivers simply hand the vehicle back. Drivers who break the contract early face a penalty charge.
Car loans are being bundled up and sold to investors in the same way mortgages were during the credit crunch a decade ago. It is feared the banks that underwrite these loans could run into trouble if default rates rise.
The RAC warned that some customers are over-stretching themselves financially. One in four drivers in its survey said they did not understand the finance options open to them when they took the deal. Three in four failed to shop around.
RAC spokesman Alastair Crossley said: ‘It’s easy to see the appeal of driving away in a new or nearly-new car with a low monthly payment. But our research suggests just how in control dealers are when it comes to deciding how much buyers spend, which is a worry.’
Adrian Dally, of the Finance & Leasing Association, said: ‘Customers enjoy high levels of legal and regulatory protections with secured types of finance, such as PCP. The motor finance industry has invested heavily over the past ten years to ensure customers get the right information at the right time, and the right product to suit their needs.’