What does inflation mean for my car finance?

What does inflation mean for my car finance?

22 September 2022 Concept Car

Ultra-high inflation is like a bad dream. For those with debt, it is worse than that: An outright nightmare.

Unfortunately, ultrahigh inflation is what all of us in the UK are facing right now. And, if the experts are correct, it’s here to stay.

If you’re currently paying off a loan – such as, for example, under a car finance agreement – you may worry that you won’t be able to keep up your payments.

What awaits you at the end of the dark tunnel?

The loss of your beloved car? A seriously downgraded credit score? Or even bankruptcy?

Questions like these may seem somewhat premature at this point. But, in fact, they’re just realistic. You need to be prepared for the worst. And the worst, as may be the case here, is yet to come, as inflation keeps surging to new record heights each week.

So, should you just give up and surrender to the hands of fate?

Of course not. In this article, we’ll explain the situation to you and offer some suggestions on how to improve your chances of getting through the crisis.

But wait … What if you haven’t taken out a car loan yet?

What to do if you’re looking for a car loan in times of high inflation?

Things are clearly a bit different in this case. At Concept Car Credit, we specialise in challenging car finance scenarios. And the current high-inflation era is definitely a challenge!

For one, the fundamentals of car finance haven’t changed. There are still three basic types of automobile loans:

  1. Fixed interest rate loans
  2. Fixed repayments loans
  3. Interest-rate adjusted loans

Loans with a flexible interest rate seem out of the question right now. Although one would suspect that we have taken the largest part of the blow, this is by no means certain. Turkey currently has an inflation rate of 80% – who knows how bad things can get in the UK?

What about fixed-interest rate loans?

This type of finance is ideal if interest rates are low. Essentially, you’re pegging the interest at the moment of signing the paperwork.

For years, fixed interest rate car loans allowed thousands of UK drivers access to affordable finance. Once the deal came into effect, they knew there’d be no more nasty surprises.

There is one obvious exception to this, which we’ll come to a little later. So read on if you want to know more.

Still, there’s a problem:

Fixed interest rate loans are anything but ideal during times when inflation is high.

And, right now, it is exceedingly hard to predict where interest rates will go.

Since the central bank has already announced that it will increase its base rates, they’re definitely expected to go up at least for a while. From this angle, there’s nothing wrong with getting car finance at the current rate – provided you can afford it.

But it may just as well come crashing down again. Which would mean you’d be paying a lot more than you have to very soon.

Why fixed monthly rates are best.

Fixed monthly rates are not the cheapest option, we’ll give you that. But at the same time, they are the one finance plan which you can truly rely on to stay the same throughout the entire repayment period.

How does this work in practise?

Based on your available income and taking petrol and insurance costs into consideration, we calculate what you should be able to afford each month. If you can make a down payment, that’s great. But we may even be able to set something up if you’re not.

Either way, this number will be your monthly rate until you’ve paid off the car in full. Even if inflation should rise to Turkish levels!

Are you interested in having this kind of security for your car finance plan? Then get in touch with us to discuss your options.

You can reach our friendly team at 0800 093 3385. Or send us a loan request using our online car finance application form.

Let’s now take a closer look at those who are already paying back a loan right now. There’s one thing we can say with absolute certainty:

Inflation is rising globally.

As the Financial Times have reported, inflation has turned into a worldwide issue.

Right now, probably, the only major country which boasts a stable inflation rate is Germany. But then again, it implemented cost-intensive counter measures. As the FT rightly asserts, in the words of Carsten Brzeski, head of macro research at ING, “the data was not yet a turning point, but rather evidence that it is currently governments and not central banks that can bring down inflation.”

Elsewhere, it seemed, economies were trying to outbid each other over the highest inflation rate. Spain’s, at 10%, was the Iberian peninsula’s highest in almost four decades. And, as mentioned, Turkey’s rate stands at a frightening 80%. As one newspaper put it, the country has effectively given up on even trying to fight it.

This is not where we’re headed in Britain. But still:

UK inflation is here to stay – and it’s “brutal.”

As the Financial Times write:

“Many UK households are “brutally exposed” to inflation after growth in real disposable income for working-age families averaged just 0.7 per cent in the 15 years leading up to the coronavirus pandemic. People in rental accommodation, single parents and those with young children are particularly badly affected.”

At 9,1%, the current level isn’t far below that of Spain and nothing points in the direction of a quick reduction. One of the main issues is that Britain also seems headed towards a recession or at least a phase of very slow or no growth. Measures to curb inflation would almost certainly put the brakes on economic recovery even more.

What help can you expect from the government?

Probably, not all that much.

The current government, under the auspices of departing prime minister Boris Johnson, has little real power to take any meaningful steps towards an improvement.

What’s more, there’s a catch 22 to the current situation. As the Economist has pointed out, all major economies took on plenty of debt while interest rates were low.

That debt is becoming more expensive by the hour.

As a result, there is little room for incisive measures similar to the ones in Germany. And Germany, too, may soon have to end its spending spree, as its seemingly eternal trade surplus has turned into a deficit for the first time in decades.

Already, retailers are feeling the effects of higher prices, as consumers have radically reduced their spending over the past weeks. Things are clearly not looking good.

What are the effects of debt on those with car credit?

We mentioned above that there are three types of car finance. If your current loan either has a fixed interest rate or a fixed monthly payment, then you’re better off at the moment than someone with an adjustable interest rate loan.

However, here’s one thing to consider: Most fixed interest-rate deals are valid for a certain time period only. If you manage to pay off the full amount within this time, that’s great. If not, you need to extend the contract.

If interest rates are lower than they were before, you can get a better deal than before. But if they’ve risen, then that spells trouble.

In this case, you could get locked into a loan with much worse conditions. So with many of these contracts up for renewal either this year or next, many drivers in the UK could be in for a bad surprise.

So is there nothing you can do? Thankfully, we have a few ideas up our sleeves. Here are some of the best recommendations for beating the inflation blues.

Reduce your petrol costs

We won’t suggest you reduce your spendings – that would be both trivial and redundant. As we indicated above, UK consumers are already cutting down on their expenses as it is.

What you can do on top of that, however, is to reduce your petrol costs. Petrol itself is one of the key inflation drivers and we reported on it becoming more expensive way back. Anything you can do to reduce its impact will significantly contribute to your budget.

One obvious thing you can do is to reduce your mileage. Use public transport whenever you can, take a walk instead of a ride and try to combine different tasks and combine routes.

Another idea is to bring down the weight of the car. Take out all unnecessary items – it really makes a difference!

And finally, try to avoid using the airconditioning as much as possible. Of all the electric devices in your vehicle, this one is the most energy-intensive one.

Further Reading:
Can you still afford petrol prices?
Fuel consumption: Are new cars less economical than used ones?

Get repairs and check ups done as soon as possible

Inflation simply means that prices are going up. So, to save costs, you probably should get all mandatory or unavoidable repairs and check ups done as soon as possible – before inflation makes them even more expensive.

Alternatively, try educating yourself about how to perform them yourself. Admittedly, not all car related jobs can be performed without the help of a professional engineer.

Some, however, are a lot easier than you’d expect – and this can save you a lot of money. So, with that in mind, start hitting Youtube and become an expert yourself.

Further Reading:
Repair or replace? Here are the Rules!

Sell your current car

If at all possible, try to sell your current car and get a cheaper one instead. Usually, this would not be possible, but since car prices have risen so much over the past year, there may just be a tiny possibility that the lender will actually consider this proposition.

Admittedly, that’s still a big “if”. And finding a truly affordable car won’t be easy, either, for the same reasons. However, you can still find decent deals if you look hard enough.

This brings us straight to the next point:

Talk to your lender

We don’t usually consider getting in touch with a bank, credit union or dealer during the repayment period. In this case, however, it may be an utter necessity.

Lenders are not as unapproachable as you may think. They have a vested interest in you paying off the debt in full. Anything else, from a repossession to a lengthy legal procedure to extract the money from you, would make things unnecessarily complicated and ultimately expensive.

It’s not as unusual as you may think to ask for a renegotiation. It’s not as unusual that these proposals actually come to pass either. Create a sensible plan that you can commit and stick to – then pick up the phone or write an email. Why don’t you visit our used car showroom today, browse our fine selection of used cars we have in stock or apply online for car finance now?

22 September 2022 Concept Car