Prudence in the driving seat as buyers under-borrow

Cautious car buyers are no longer “maxing-out” on their borrowing ability, and are increasingly choosing vehicles priced below the amount of the loan for which they qualify.

That’s the finding of Specialist Motor Finance which says it will shortly be reducing by 25% the minimum loan it is prepared to advance for car purchases.

It means that vehicles costing £3,000 will in future be funded, enabling more customers to exercise prudence by building in an extra safety margin to their repayments.

The number of car buyers under-committing to the size of the loans for which they are eligible is growing, according to David Challinor, managing director of Chester-based SMF:

“I think we are witnessing a reluctance among some customers not to take their borrowing to the limit, even when this has already been set at a realistic level,” he said.

“They would rather sacrifice the size of car they buy, or drop down a level of refinement, in order to create a bigger buffer between their income and outgoings.

“We feel that an entirely appropriate response is to provide leeway so that, for example, someone approved for a £4,000 loan does not have to commit to a car of that price.

“If they feel more comfortable with a smaller repayment plan, this should be an option – but the trend for under-borrowing isn’t evident just among budget buyers.

“Even five-figure amounts we approve after demonstrating affordability are often drawn down as a lesser sum after the buyer imposes their own traffic light system for the loan,” added Mr Challinor.

Specialist Motor Finance said it identified the phenomenon after a recent analysis of over £100 million of HP advances it has made through finance brokers and dealers.

Customers, said Mr Challinor, largely comprise those whose credit profiles preclude their acceptance by mainstream lenders, but who are not experiencing chronic financial difficulties.

On the contrary, he says, SMF’s credit scoring system often reveals comfortable earnings in secure employment, and only average levels of existing financial commitment.

Mr Challinor believes the findings point to a rise in the number of financially incisive buyers who are being shunned by some traditional lenders because of historic or minor credit glitches.

Earlier this year, Specialist Motor Finance announced plans to accelerate its growth in the non-standard loan motor markets after receiving a new funding injection of £110 million.