Car company loans boom as other lenders shun borrowers

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The Independent Online

The number of consumers taking out car loans from vehicle dealerships has rocketed over the past year, as other lenders have raised both their interest rates and rejection rates.

Volkswagen said this weekend that it had hit its 2008 target of £1bn worth of car loans five months ahead of schedule – in spite of an overall slump in car sales in the UK.

"We put our success down to the fact that we have more available funds and can move faster than other financial organisations," said Volkswagen's managing director Graham Wheeler. "Long-term planning means the credit crunch is not affecting our lending abilities."

While car finance has historically been expensive compared with personal loans available in the wider market, most high street lenders have been increasing their interest rates over the past year. According to Moneysupermarket.com, the comparison website, the average of the top five cheapest personal loans is currently 7.7 per cent, compared with 6.5 per cent this time last year. Furthermore, lenders are rejecting many more loan applications this year, accepting only those with the very best credit ratings.

Volkswagen is currently offering loans as low as 7.8 per cent APR, while Peugeot Citroen offers finance starting at 7.9 per cent, and Renault loans are just over 8 per cent.

Tim Moss, head of loans at moneysupermarket.com, said the success of the car finance products was driven by two factors. "Firstly, personal loans are extremely hard to get at the moment, but with car finance, your loan is secured against the metal, so it's a lot less risky for the company. Secondly, while people used to turn their noses up at car finance because they could get a loan for 6.5 per cent somewhere else, they're now going away and either realising that car finance is cheaper than any personal loan they can get, or their only option."

Mr Moss said the cheapest personal loan rate on money-supermarket.com would not have featured amongst 10 cheapest deals this time last year.

Although car sales have fallen away sharply in recent months, Mr Moss said there are now some very competitive deals for those who are willing to shop around. "I just bought a Renault, which had a list price of £21,500, for £14,000 – brand new," he said.

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