If you recently borrowed money to buy a brand new car, you’re in good company. In four years to May 2016, financing for new vehicles doubled. Car loans now make up 60% of all loans, in fact, Australians are bingeing on car buying.
Cars have never been this affordable, based on the number of weeks it takes to save for a car on an average wage. CommSec says it takes only 22 weeks on an average wage to purchase a new Holden Commodore Evoke, compared to nearly 32 weeks a decade ago. Yet late payments on car loans are at their highest level since 2010.
It could be a case of sub-prime cars. Just as borrowers with poor credit were able to buy houses in the US – which led to the GFC – so borrowers, some with poor credit, are buying cars in the US, UK and Australia.
Things are looking shaky for creditors in the UK. British households borrowed a record 31.6 billion pounds in 2016 to buy cars, up 12% on the year before. Ninety percent of private car buyers use personal contract plans (PCPs). PCPs are shorter term than higher purchase, buyers do not own the car at the end, and have the option to pay off the remaining value to buy it.
In the US, outstanding car loans jumped to $US1.1 trillion in 2016 and car loans were being taken out faster than at any time in history.
Yet borrowing to buy a car may not be the most sensible thing to do.
“Borrowing is a very bad idea when it is done against a depreciating asset … such as a car”, one UK banking spokesperson said.
BMW Australia Finance was forced at the end of last year to repay $77 million after breaching Australian rules for responsible lending.
This was a record for a consumer payback scheme in Australia. The company also agreed to pay $5 million towards consumer advocacy and financial literacy. That means explaining clearly to people what they are getting into with a car loan.
Paying for a vehicle outright will always be cheaper than a loan. But given Australian indebtedness on credit cards, it is becoming harder to do. Household debt has already skyrocketed to 125% of GDP: the highest ratio of household debt to GDP compared to 44 other countries.
Australians have made a record number of calls to the National Debt Helpline.
This begs the question how much you need that new car, especially when you have to register it, pay for a green slip, and cover the running costs each and every day.