British households are buying almost 3,000 cars a day on finance deals, leading to fears of another dangerous debt boom.

Industry figures show a record £31.6billion was borrowed last year to buy cars – up 12 per cent on the year before.

The car industry has been one of the UK’s biggest success stories, but it has also been built on household debt. More than one million cars were sold through finance deals last year alone, according to the Finance and Leasing Association.

British households are buying almost 3,000 cars a day on finance deals, leading to fears of another dangerous debt boom

Record low interest rates are enabling car manufacturers to offer increasingly cheap deals, which are proving impossible to resist for many households.

But the Bank of England has singled out the car finance boom as one of the main reasons that household borrowing – excluding mortgages – is rising at the fastest pace in 11 years.

Mortgage brokers have even warned that many people buying a car on finance could be scuppering their chances of buying their dream home. Strict affordability checks by lenders mean such a deal can wipe tens of thousands of pounds off the amount they will lend.

It is estimated that around two-thirds of private new car buyers rent their vehicles through personal contract plans (PCPs), which are typically offered by the finance arms of car manufacturers.

Under a PCP, the car buyer puts down a deposit of around ten per cent of the car’s price, and makes a monthly payment to rent it for two or three years.

At the end of the contract the renter has the choice of either returning the vehicle, or buying it.

The price is set at the outset based on the predicted value of the car in the second-hand market.

Experts say most drivers choose to ‘flip’ to another finance deal on a new car.

Guy Anker from MoneySavingExpert said: ‘The advantage of car finance is it gives you more flexibility. You can choose whether to buy the car.

'But if your credit score is good enough it’s likely to be a lot cheaper to take out a personal loan if you want to buy a car.’

Blaming price rises on Brexit is a 'try-on' Car manufacturers have been accused of ‘trying it on’ by blaming a surge in prices on the effects of the Brexit referendum. A study by What Car? magazine shows a 5.2 per cent rise in list prices since June. On the basis of the number of cars sold in that period, it means British drivers paid an extra £2billion more than in the same seven-month period a year previously. The report says: ‘These increases are thought to be partly a by-product of the Brexit vote, which immediately knocked the value of the pound and consequently the cost of importing both cars and the raw materials that go into their production.’ What Car? editor Steve Huntingford said: ‘We knew prices were going up, but rather than a gradual rise, our research shows there has been a perfect storm of elements that conspired to create a big bang in price hikes.’ But Professor Garel Rhys, president of Cardiff University’s Centre for Automotive Industry Research, said: ‘If car makers are blaming Brexit, it’s a try-on. The exchange rates for the pound have recovered much of the falls immediately after Brexit. ‘Add to that the fact that Britain is one of the world’s most competitive markets, so prices have to be kept keen if they want to sell their cars. Consumers should haggle down hard any rises in the list price.’ Advertisement

However, motorists can also be hit with hundreds of pounds in extra charges, including penalties of up to 30p a mile for exceeding an agreed mileage limit when the finance deal expires. Those who fail to meet their monthly repayments will also damage their credit rating, making it harder for them to get a mortgage or a loan.

The Bank of England has warned that the popularity of car finance deals has helped push up household debt at the fastest pace since before the financial crisis.

Investment firm Schoders has branded the binge on car finance as a ‘flashing light’ and warned of the dangers of ‘borrowing against a depreciating asset’.

Consumer campaigner and former pensions minister Baroness Altmann is worried households are repeating the mistakes of the past. ‘Households that have big mortgages, overdrafts, loans and car finance repayments could be left in an unsustainable position, particularly when interest rates rise,’ she said.

Under a PCP, the car buyer puts down a deposit of around ten per cent of the car’s price, and makes a monthly payment to rent it for two or three years

Mortgage brokers have reported an increase in the number of clients who are unable to buy the house they want because they are making monthly payments on one or sometimes two cars.

It has been estimated that a loan application showing a car deal costing £280 a month could reduce a mortgage offer by £40,000 – from £290,000 to £250,000.

Experts say many house-hunters are unaware of the implications and end up having to look for cheaper properties.

Adrian Dally, the head of motor finance at the Finance and Leasing Association, said: ‘Motor finance is a highly competitive and customer-focused sector. Strict affordability checks are under- taken to ensure that credit is responsibly provided.’