Could the next financial crisis be facilitated by car finance debts?

A number of experts have expressed concern that the enormous increase in people taking loans from firms to purchase vehicles could spark an economic crisis. Car finance has become an incredibly popular alternative over the last few years; by letting drivers purchase a car in bite-size instalments rather than a lump sum it ostensibly allows for better money management. However, a spike in unemployment or an increase in interest rates in the United Kingdom could make it impossible for many drivers to keep up with repayments. Consequently, this might spark a financial crisis.

Andrew Bailey, the chief executive of the Financial Conduct Authority, has dismissed fears that the popularity of car finance could herald economic doom. Mr Bailey explained that the growing popularity of car finance is not necessarily a bad thing; it merely signifies a shift away from car ownership to car rental. However, the Financial Conduct Authority has also urged customers to fully understand the terms and conditions that come with car finance.

One of the most popular forms of car finance are personal contract purchase plans. These involve monthly repayments being made by a driver for two to four years, in which time they are in full ownership of a car, before handing the car back at the end of the period. Amid fears that Mis-sold PCPs may spell economic disaster, the Financial Conduct Authority has sought to re-assure people. They reminded Britons that although car finance does account for £58 billion of the country’s £200 billion debt, this is still far less than credit card debt. Credit card debt exceeds £65 billion in the United Kingdom.

Andrew Bailey did recommend a few ways in which firms could improve their car finance schemes. He explained that interest can often be excessive for many ordinary families with some lenders demanding £2.50 back for every £1 they give to drivers. Furthermore, he encouraged lenders to offer more incentives to drivers who may be struggling with the cost of repayments.

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