Credit bubble fears as British drivers borrow £32billion to buy more than two million new cars in a year

Credit bubble fears as British drivers borrow £32billion to buy more than two million new cars in a year

The purchase price is set at the outset based on the predicted value of the car in the secondhand market.

The amount you have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal, minus the deposit.

The motorist pays this amount off during the deal, plus interest.

The customer has an option of making a final payment at the end of the deal, but experts say most choose to flip to another finance deal on a new car.

Experts have warned that these finance deals – which typically charge interest of between 4 per cent and 7 per cent – are usually a more expensive way of buying a car than taking out a personal loan and purchasing the car outright.

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 damage their credit rating, making it harder for them to get a mortgage or a loan.

Last night experts raised concerns about the boom in car finance.

Baroness Altmann, a former pensions minister and veteran consumer campaigner, said: This is an astonishing increase in borrowing could end in tears.

There are huge dangers of relying on ever increasing consumer debt to fuel your economy. If your economy is built on debt and youre relying on more debt to boost growth then youre heading for a crash.

This is exactly what happened in the early noughties – Gordon Browns idea was that borrowing creates its own growth. He was relaxed about not saving and encouraging irresponsible consumer debt.

This was all fine until the crash. Were getting back to those levels again.

Wes Streeting, a Labour member of the commons Treasury committee, added: As a country we have to start asking fund questions the level of unsecured lending that is taking place.

We are storing up serious problems for the economy by relying on consumer credit to drive growth