Car finance borrowing balloons to new record in 2022

The amount UK drivers borrowed to pay for cars hit a new record in 2022, rising by over £4 billion compared to the previous year says the The Car Expert.

Despite fewer new and used car sales, the analysis of the full-year data published by the Finance and Leasing Association (FLA), showed that borrowing reached £40.7 billion in 2022, with the average finance amount per vehicle also hitting new records for new and used cars.

New car buyers borrowed £25,325 on average while used purchases incurred £15,475 of debt, up from £23,746 and £14,113 respectively in 2021.

The analysis by the UK’s most comprehensive automotive consumer advice site signals a possible high watermark for the amount financed annually as salary sacrifice schemes rise in popularity in line with growing electric vehicle sales.

But with total new and used car borrowing reaching new heights at a time when the UK is undergoing a cost of living crisis, motorists could find themselves in financial distress.

More than 2.2 million drivers used car finance agreements last year, around 3% up on the previous year, while total the amount borrowed increased by 9%.

Since 2009, the amount of annual car finance debt has rocketed by nearly 270%, rising from £11.1 billion to £40.7 billion in 2022. Average borrowing per new vehicle has also ballooned, doubling from around £12,000 to over £25,000 last year.

In comparison, average weekly earnings across the year have risen from £435 in 2009 to £614 in 2022 – just a 41% increase.

Stuart Masson, Editorial Director at The Car Expert, said: “The UK’s addiction to car finance has grown significantly since 2009, and with another record year of total borrowing last year during the cost of living crisis, we may see household finances under increasing pressure.

“Average borrowing for both new and used vehicles has increased again, too, despite rising interest rates.”

Consumer new car registrations were up about 16,000 units in 2022 according to the full-year results published by the Society of Motor Manufacturers and Traders (SMMT), but the number of new car finance deals fell by more than 50,000 in 2022.

Masson added: “For the previous four years, more than 90% of new car buyers financed their car through dealer-sourced finance. However, that has dropped substantially to 84% – the principal reason for this is the rapidly growing number of new electric vehicle sales, which are often financed through salary sacrifice schemes that benefit from significant tax savings.

“As electric cars continue to rise in popularity, so will salary sacrifice. This means the car payments are taken from an employee’s pre-tax salary, while you must pay tax on the value of the car, the taxation rate (called Benefit-in-Kind, or BiK) is much lower for EVs than it is for petrol or diesel cars.

“As EVs are only going to get more popular in coming years, we are likely to see a permanent shift into how new cars are financed. The chancellor has pledged that new EVs will maintain their Benefit-in-Kind advantage until at least 2028, but don’t forget that governments can u-turn at a moment’s notice.”

The used car marketplace saw the reverse of new cars with fewer vehicles sold than in the previous year but more of those cars being financed via dealership-sourced lenders.

About 600,000 fewer used cars – a 9% decrease – changed hands in 2022 compared to the previous year, according to SMMT data published earlier this month. However, the number of used car finance agreements increased by more than 130,000, which is around 10%. On top of that, the average amount borrowed jumped substantially.

For further analysis of the UK’s car finance position, a more detailed analysis has been published on The Car Expert.

Car finance Q&A

What are the main car financing options?

Most people buying a new or used car will do so using some sort of car finance. The most common ways of financing a vehicle are through PCP (personal contract purchase), HP (hire purchase), PCH car leasing (personal contract hire), salary sacrifice and a newly emerging option, subscription services.

PCP is currently by far the most popular way for private customers to finance a new or used vehicle. For more information about the various options, visit:

What is salary sacrifice?

Salary sacrifice is a way of leasing a new car with payments taken from your pre-tax salary, rather than after-tax salary. It’s a more complicated form of financing to understand, and your employer must be signed up with a service provider to manage it, but it can be significantly cheaper than a lease or PCP on the same car – especially for electric cars.

Employees can sacrifice a fixed amount of their gross salary and in return, they can lease a brand new environmentally friendly car. There are three main salary sacrifice benefits for employees, including savings on income tax and National Insurance, no deposit or credit check required and an all-inclusive monthly fee. Find out more here:

What are the options for those stuck in finance deals they can’t afford?

In some circumstances, you can settle an HP or PCP agreement early. There is a consumer right that is built into every regulated personal contract purchase (PCP) and hire purchase (HP) car finance agreement – the right to voluntary termination (VT). Voluntary termination is the legal right for a consumer to end a finance agreement early and walk away in certain circumstances.

Voluntary termination tends to be more helpful for HP finance rather than PCP finance, but it all depends on how the loan was set up to begin with and there are some potential complexities involved.

Find out more here:

Why is the UK borrowing so much for increasingly expensive cars?

UK drivers are borrowing far more to finance their cars compared to just 10 or 15 years’ ago. Not only are more people financing new and used cars, but the vehicles are getting more expensive, so people are borrowing more per vehicle. While wages have increased over the years, it has not kept pace with the amount that people borrow – weekly wages have increased by 41% since 2009 but new car finance levels have doubled.

Although the cost of cars has increased over the last decade – inflation alone makes up a fair amount of this increase – the concern is that buyers are borrowing more and more money to replace their cars with like-for-like models, which may not be sustainable.

With significantly higher debt levels, there’s an increased chance that more people will default on their loans if they hit any kind of unexpected financial troubles, such as sudden increases to their household budgets as we’ve seen over the last year.

Is the cost of EVs likely to come down?

Electric cars are pricey, there’s no getting around that at the moment. While up to half of new EV buyers are saving money by using salary sacrifice schemes, which have significant tax advantages, many are still using PCP and other funding options.

In 2023, we can expect to see more new car brands arriving in the UK, creating additional competition to existing car manufacturers. This should help to bring prices down for new car buyers, while the rapid growth in new EV sales over the last couple of years will mean more used EVs than ever before will be hitting the used car market in 2023. This should start to make buying an EV more affordable over the coming months.


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