Will Car Finance Companies Reduce Lending As The Cost Of Living Increases? 

Most people who own and run a car will already know only too well how the cost of living crisis is affecting motoring today. The price of wholesale fuel may be on the turn but there are still inflation-busting fuel prices for both petrol and diesel on the forecourt. As such, one of the main drivers of the much-vaunted cost of living crisis in the UK is the price of fuel. In addition, of course, the pandemic caused significant disruption to the production of new cars, causing second-hand car prices to soar. In fact, it has never been a better time to sell your car. Nevertheless, this may involve obtaining finance to buy your next one.

Therefore, it is important to note that some car finance companies are already looking more closely at the sort of risks they are willing to take. With people needing to borrow more to buy the sort of car they would like, this necessarily makes lenders warier. In addition, the affordability of car loan repayments becomes another big factor they need to take into account as household budgets are stretched. After all, car finance firms know only too well that borrowers are more likely to default on their loans if they are under pressure with their incomes in other areas. Remember that it isn’t just the cost of fuel that makes the daily car commute more expensive. Upward trends in petrol and diesel push the costs of all distribution up, something that affects everything from groceries to consumer electronics.

What Risk Managers Worry About

What risk managers at car finance companies are most worried about, however, isn’t just a further upturn in inflation, something that would make borrowing less affordable to everyday consumers. They are more concerned about the Bank of England and how it will determine interest rates in the next six months or so. Why? Because the Bank of England sets the base rate from which all lenders take their cue. If interest rates go up – and they’ve already started to go higher – then there will be two effects that car finance companies will feel almost immediately.

Firstly, they will have to put up the cost of their typical percentage rates. Finance companies don’t charge everyone the same rates of interest – it will depend on how competitive they are and the degree of risk and individual customer poses, something they work out by examining your credit history. If charges go up, some people who are deemed to be at the riskier end of the scale won’t be offered credit at all.

Secondly, all other borrowing costs will go up if the Bank of England increases interest rates. That means credit card debt, personal loans, mortgages and mobile phone contracts, for example, will all become more expensive. The net result of this will mean household budgets will be stretched even further, making it more likely that some borrowers will get behind on their car payments and even default on them outright. Consequently, you may need to sell your car to cover the remaining debt with the finance company. Equally, they could repossess it or pursue you through the courts to recover any outstanding sums.

Of course, car financing firms want to continue to lend money. Their business model is based on it, after all. However, it may mean you need a better credit history, a bigger deposit or a longer loan term to make the borrowing affordable. If you sell your car now and opt for a smaller, more fuel-efficient model, then you can get ahead of this potential problem area that other motorists may soon face. Enter your registration number at sellmycaressex.co.uk to request a no-obligation valuation right now.