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The party may be over for cheap car finance

The watchdogs could curb the supply of credit that allows millions to drive a new vehicle — at a price.

There was a time when a first car was a tin can on wheels and families had a trusty saloon to drive the kids around. However, you may have recently noticed that the vehicles in the supermarket car park are getting smarter. The number of people buying a new car on finance is accelerating. Last year Britons borrowed a record £31.6 billion to buy cars, a 12 per cent rise compared with 2015, according to the Finance and Leasing Association.

Nearly 3,000 cars a day are bought on finance. About 1.2 million people a year take out a car loan, says Anthony Coombs, the executive chairman of S&U, which owns a motor finance business. But the party may soon be over.

Experts warn that increasing numbers of people are finding that their car loan is preventing them from taking out a mortgage.

The repayments on a car loan are taken into account by mortgage providers when they decide how much to lend. Even a monthly commitment of £250 can wipe £40,000 off how much is offered: “I am not sure people realise the loans can make such a difference when they are factored into the affordability calculations — especially when they have other unsecured debts,” says Aaron Strutt, the product director at Trinity Financial, a mortgage broker.

In one example, a couple with a combined salary of £75,000 and a car loan were offered £246,560. Without the vehicle they would have been offered a mortgage of £287,695.

Meanwhile the Bank of England is keeping a close eye on household borrowing, which has reached record levels, so City regulators may soon intervene to stop lenders offering debt so liberally.

The debt piled up on credit cards was at the highest recorded level in January, and there are fears that a debt bubble is emerging. The Bank’s figures show that car finance has rocketed since 2010, when it made up only a small fraction of overall consumer debt.

About 80 per cent of private car buyers have taken out a personal contract purchase (PCP), according to the Society of Motor Manufacturers and Traders. PCPs allow you to lease a car from a dealer for three or four years, with the option to buy it outright at the end. The deals have looser credit criteria than traditional personal loans and allow you to drive a top-end car for as little as £200 a month.

Judging by bestseller lists, Britons are going for flashier models. According to Auto Express, the car magazine, two of the most popular are the Mercedes-Benz C-Class, which starts at £29,635 on the road, and the Nissan Qashqai at £24,145.

The high cost of vehicles is partly behind the increased use of car finance. Kevin Pratt, the consumer affairs spokesman at Money Supermarket, says: “PCPs have brought new cars within the reach of people who would otherwise not be able to afford them, but the consequence is increasing debt.”

Rachel Springall, the finance expert at Moneyfacts, says: “Customers would be wise not to be pulled in on taking the first finance offer at a car dealership and instead shop around for a best-buy loan independently.”

The car industry has also benefited through the sale of consumer finance and annual vehicle insurance. In January the highest number of new cars were registered in the UK in 12 years.

Consumer groups have warned about rising household debt. A TUC calculation in January, based on Office for National Statistics figures, found that the average British household owes a record £12,887 before mortgages.