Huge jump in borrowers requiring car loans

Car scrappage scheme hailed a success, but concerns that it has encouraged consumers to take on more debt

There has been a sharp increase in the amount of money borrowed on personal loans to purchase cars following the introduction of the government’s car scrappage scheme, a report claimed today.

Sainsbury’s Finance estimates that the scrappage scheme is directly responsible for a 37 per cent increase in the value of personal loans taken out to purchase cars in the three months immediately after May 18, when the scheme was introduced.

It believes £61.2 million of personal loans a month have been taken out to purchase cars in the UK since May 18, compared with a monthly average of £44.7 million before the introduction of the scrappage scheme. The average amount borrowed was £7,515.

The figures highlight the success of the government scheme, which offers up to £2,000 off the purchase of a new vehicle in exchange for a car at least ten years old. The Society of Motor Manufacturers and Traders reported recently that 367,929 new cars were registered in September – an 11.3 per cent increase on the previous year.

However, others express a note of caution. A spokesman for the comparison website Uswitch.com said: “Consumers should be cautious about taking out a loan unnecessarily and getting themselves into more debt. Also, the benefit of scrappage is undermined by huge falls in value of a new car as soon as it is driven off the forecourt.”

The spokesman points out that the number of loan deals has decreased by about 37 per cent in the last 12 months, while rates have also increased. Since the start of September, three unsecured personal loan providers, Marks and Spencer, Egg and Alliance and Leicester, have implemented rate hikes of up to 1.2 per cent for new customers.

Some of the cheapest loans are available from the internet only provider, Yourpersonalloan.co.uk which offers a rate of 8 per cent on a typical loan of £5,000 over three years for new customers. Existing customers can get even better rates.