Traditional car financing could be past its peak as personal leasing, salary sacrifice schemes, and subscriptions rise in popularity along with a growth in electric car sales.
The UK’s car finance bubble is on the brink of bursting as demand for new car finance deals slows down dramatically compared to new car sales, according to analysis by The Car Expert.
Data from the Finance and Leasing Association showed the number of new finance deals dropped by 7% in the first six months of this year, despite private new car sales rising by 2%.
However, even with the drop in the number of finance deals, the average amount of borrowing per new car in the first six months of 2023 is at a record high of £25,600, about 3% up on last year.
The analysis by the UK’s most comprehensive automotive consumer advice site could signal that traditional car financing has past its peak as personal leasing, salary sacrifice schemes – which provide significant tax savings – and subscriptions rise in popularity in line with growing electric vehicle sales.
Stuart Masson (above), Editorial Director at The Car Expert, said, “Motorists are increasingly opting for ‘usership’ over ownership as we see demand for traditional car finance dwindle. Nearly every new car buyer for several years has been arranging their car finance at the dealership.
“In 2009, less than half of all private new car buyers used the manufacturers’ financing. By 2018, it was more than 90% and peaked in 2020 at 93%. From around summer of 2021 onwards, the number of new car buyers financing their cars in this manner started falling and has continued to do so at an ever-increasing rate. Based on the data for the first six months of this year, it has fallen to less than 79%.
“The reasons for the shift are complex, but part of it is better consumer awareness and because more finance options are springing up to meet customer demand for lower monthly payments and more flexibility. On top of that, the EV revolution is playing a key part.”
The Covid-19 pandemic, and the ongoing production problems that have followed, Russia’s war against Ukraine and the cost-of-living crisis have all impacted the car industry – this upheaval has played out while the sector tackles the significant process of phasing out fossil-fuel cars in favour of electric vehicles.
Stuart added, “These factors have caused disruption to new car supply and pricing, which has impacted customer choice. But there is also something of a revolution going on in terms of automotive retail, with new types of funding opening up for customers.
“In recent years, we have seen growth in leasing (personal contract hire) for private customers, rather than it being the exclusive domain of fleet buyers. There are various reasons for that, but the key issue here is that leasing numbers don’t count towards the FLA’s car finance data as no money is being borrowed – leasing is simply a rental.
“Likewise, we’re now seeing significant interest and growth in two other types of car funding; salary sacrifice and car subscriptions. These are also forms of leasing or rental, so again they don’t show up in the FLA data.”
The switch to EVs will likely accelerate shift away from PCPs and other traditional forms of car finance to alternatives which are more flexible and incorporate all cost like subscriptions. While EV sales have remained relatively static this year with a 16% market share in July, this is up significantly on the 11% share EVs represented in July 2022.
With the general increase in the cost of new cars and pricier electric alternatives, longer-term finance options may also become more attractive to keep monthly costs down.