Quite a few science authors have predicted a future without cars. They probably weren’t thinking of cars getting too expensive. And yet, this is precisely what the UK car market seems to be destined for.
With an across-the-board price hike of about 30%, many automobiles are now firmly beyond the average UK driver’s budget.
And things are getting worse: As new car costs are edging upwards, so, too, are used car prices. Supply issues are almost certain to plague buyers well into 2023 – which means less used vehicles and, thus, even higher prices.
Do you need a new automobile and are you afraid you won’t be able to afford it? Then keep reading, we have all the facts and answers you need to get behind the wheel again.
To understand what’s happening, let’s take a look at a few facts and figures.
The main driver for these woes is a supply issue for new cars. Manufacturers simply can not get the required quantities of raw materials to produce enough cars to keep up with the demand. This means waiting times and price increases across the board.
Second hand cars are cheaper and instantly available, which makes them the ideal choice for anyone needing a car instantly. This, in combination with less available cars from the new automobile market, has also sent used car costs North.
But that’s not all.
Statistics from hell
These cost increases come right at a crucial moment in UK history. For the first time in the 2000s, available income has dropped. Which makes for a tragic double blow:
Not only are car prices skyrocketing. UK households now also have less money available to spend.
According to Express, this is what that amounts to in practise:
“In 2017, when the typical salary was under £29,000 and used cars under £12,000, a used vehicle took 41.5 percent of the average person’s wage. Now, second-hand vehicles are taking almost six percent more of annual income, and quickly approaching 50 percent.”
And, believe it or not, it gets worse.
Inflation is currently rampant. This essentially means that everything else is also getting more expensive.
So, summing up, here’s the breakdown of the current malaise:
Car prices are rising.
Income is falling.
Inflation is rising, which means there is even less income available to spend on a car.
Surely, for car buyers, these are the statistics from hell!
How much of your annual income should go towards your car?
This is a really important question. In fact, it is of truly seminal relevance here.
If we just look at the ratio of annual income to purchasing price of a car, then most experts seem to agree that around 35% is a sensible indication. So, if we take the aforementioned 41.4 percent as an indication, already before the price surge of 2021/2022, Brits were spending too much on their cars.
Is your head spinning with all these numbers? Let’s make things more transparent.
Especially with financing models like PCPs, what really decides on how viable a loan is, is the monthly rate. Experts tend to recommend higher monthly rates to pay back your debt as fast as possible. That said, a higher monthly rate is a burden. It is always a risk, too.
So, what you should really be asking yourself is this:
What should the ratio of monthly income to loan repayments look like?
Over time, different insiders have given different answers to this question. Here are a couple of the most pertinent and sensible ones:
Your total loan payments in a month should not exceed 36% of your net income. (Occasionally reduced to 10%) This is essentially the 35% rule we mentioned above, translated to your loan repayments.
You should not spend more than 15% of your net income each month on car expenses.
Some feel these rules are to simplistic. So they combined different aspects of the issue into more complex financial strategies:
Keep the car loan repayment costs to a maximum of 15% of your net income AND keep your total car costs to a maximum of 15% of your net income AND keep your total debt repayment costs below 36%.
Never go for less than a 20% down payment AND never exceed a four year auto loan AND never pay more than 10% of your annual salary on a car.
You better have a pocket calculator ready for these!
We personally feel as though restricting yourself to 10-15% on your car each month is unrealistic, especially at current price levels.
Instead, we recommend a 10% downpayment and capping your total debt repayments at around 45%.
The CCC approach to financing is always based on what you can afford. So the best solution is always to base these percentages on your actual situation.
How do you get there?
There are factors you can not influence. Right now, there is no saying whether inflation will go up or down. But you shouldn’t worry too much about it either way. After all, this is not in your hands!
The same goes for the general price level of the used and new car markets. As we pointed out, the increase in costs can be explained by supply issues. As long as these endure, there is little chance that costs will come down.
Finally, for most employees in the UK, looking for a pay raise is mute. Most of us are happy to have a job at all! Of course, it would be great if you could simply get a better paying job or a second one. But it does not look very likely.
How can I improve my chances for a bad credit car loan in 2022?
Here are a few suggestions which can really make a difference:
Start saving up for a downpayment. Downpayments are one of the most under appreciated instruments to get a great loan. They install trust in the lender and they’re not that hard to realise: Simply put aside the amount you’d pay for a loan at the end of each month for a while – and then use that as your first instalment.
Make all payments on time: It is a bitter fact of life that many credit score problems are not the result of financial problems, but of negligence. How often did you miss a payment deadline simply because you did not set a reminder? These missed payments add up in your credit history and they can spell trouble. Which leads us to the most simple rule of buying: Don’t buy things you can’t afford and pay for everything you buy straight away.
Resolve possible credit card issues: Credit cards are very useful, we know. They can also be a stumbling block when it comes to car finance. Many UK households have too many of them, with debt spread around these cards. Better to cancel all but one card, get rid of as much debt as you can and then use the – ideally only – remaining card to rebuild your credit score.