Asking yourself the question, “How economic shifts impact consumer car finance options?” from time to time is really not a bad question to be asking yourself. It is one we, at MFO, get asked time and time again, and quite rightly so. Ask yourself, do you want to buy a car but not sure about finance?
You’re not alone. The UK’s economic landscape is always changing. Lenders modify their deals constantly. Inflation and interest rates fluctuate. The economic situation means your budget changes practically on a daily basis.
Want to understand how to navigate through it all to bag a bargain?
Get all the expert information you need right here…
What you’ll learn
- How Interest Rates Impact Consumer Car Finance Options
- How inflation shapes car finance affordability
- The ripple effect of economic uncertainty
- Timing your purchase to make the most of changes
Interest Rates: The Biggest Game Changer
Let’s start with the big one…
Interest rates are the single most important economic factor that will have a direct effect on your car finance options. If the Bank of England changes its base rate then lenders will adjust their rates to keep in line.
When they do so will your monthly payments jump right along with them.
In May 2025, for example, the Bank of England lowered rates to 4.25% from 4.5%. On the surface that doesn’t sound like much. Over the typical term for a finance deal it will though save you a couple of hundred pounds.
Data by Holmesdale Car Finance shows over 2 million cars were sold to consumers with financing in the UK in a span of 12 months.
That’s an astronomical number that means every change in interest rates ripples through millions of consumers’ finance agreements, their payments and the cars they can afford.
Here’s how it works
When interest rates drop, lenders can offer lower APRs for their finance deals. Your PCP or HP contract just became more affordable. That means lower monthly repayments and the opportunity to save money or upgrade your car.
And when rates go the other way? The opposite is true.
Your borrowing costs increase and the car you could comfortably afford 6 months ago could well now be off limits. It’s why timing can be so important when it comes to car finance.
The Inflation Factor You Can’t Ignore
Inflation doesn’t just cost you more at the grocery store…
It completely transforms the consumer car finance market. When prices go up across the economy, several things happen at the same time, which affect your ability to get a car on finance.
First, the cars themselves get more expensive. Manufacturers pass their rising costs onto consumers. Dealerships then adjust their prices to maintain profit margins. Before you know it, the car you have your eye on is £2,000 more expensive than it was last year.
Second, the lenders get jittery.
High inflation is bad for business. It creates uncertainty and when lenders are feeling uncertain, they change their lending criteria and become a lot stricter. You may need to put down a bigger deposit, face tougher affordability checks.
Let’s be honest:
If your outgoings are rising (groceries, energy, fuel) but your income isn’t going up to match, lenders start worrying that you won’t be able to afford the repayments. They know people can’t keep up with their outgoings if their wages stagnate. This makes lenders change the rules so fewer people qualify for finance.
The good news is, when inflation starts to calm, lenders relax. Criteria are loosened and deals improve. It’s all about timing it right and catching the economic cycle when it suits you.
When Economic Uncertainty Changes Lender Behaviour
Are you aware of how quickly the market can change?
One month everything is going great and looks stable. The next it’s a completely different story and economic forecasts look dire. The finance market as a whole becomes a very different place.
When the economy is volatile, lenders become much more cautious with their lending. They know that people are getting made redundant and incomes are being slashed. This makes it harder for them to keep up with repayments. To protect themselves, the lenders:
- Increase their rates to cover their risks
- Ask for bigger deposits
- Shorten the length of the loans they offer
- Tighten their credit score requirements
But here’s the secret most people don’t know…
Economic uncertainty also creates opportunities. When lenders start fighting over a smaller number of potential buyers they will start offering various incentives to win business. This could be manufacturers subsidising their interest rates. Or dealerships giving contributions to help shift deals.
Consumer Confidence Drives Market Behaviour
Consumer confidence matters more than you may realise.
When people are feeling positive, they buy cars on finance. The market grows and lenders are fighting over fewer buyers. Competition typically heats up and this results in better deals and more flexible finance terms.
In March 2025 the Finance & Leasing Association (FLA) reported a whopping 11% increase in consumer car finance new business volumes over March 2024.
That growth is a direct reflection of consumers’ confidence continuing to improve, even in the face of inflationary and cost of living pressures.
But here’s the thing: consumer confidence can be easily undermined.
People are still wary of car finance from past scandals and mis-selling. One report shows that a concerning 61% of consumers are put off car finance due to a tarnished industry reputation and its past issues.
When consumer confidence drops the whole market contracts. People stop taking out finance deals. Lenders respond by changing their offers and in a downturn they often make them less attractive to those who remain.
Employment Rates and Lending Confidence
Lenders are obsessed with employment data…
Why? Because jobs and salaries determine a person’s ability to repay their loan. When unemployment figures rise, so too do defaults on loans. To protect themselves, lenders make their requirements more stringent.
In times of strong employment, lenders are typically more generous. They know people are more likely to have the income to repay the loan over its full term. For borrowers this results in lower rates, longer terms being made available, smaller deposits required and more relaxed affordability assessments.
The car finance market is currently supporting the buying decisions of over 6 million customers in all corners of the UK. That’s an enormous number of consumers and their finance options being directly affected by employment levels staying high.
Government Policy Impacts Your Options
Government policy changes are another major factor.
Changes to things like vehicle excise duty, environmental regulations and EV incentives all feed through to the car finance market. When the VED hikes were announced for April 2025, the consumer market went into overdrive as buyers brought their purchases forward.
This resulted in a temporary increase in finance activity as consumers moved their purchase decisions forward to avoid the hike. Lenders had to boost capacity and their offers to service the increase in demand.
Government incentives to switch to electric vehicles are also now being pushed through into lenders’ finance products. Lenders are offering preferential deals, loans and rates to people who purchase EVs or hybrid vehicles. Incentives like this change the overall market and create pockets of opportunity.
Timing Your Purchase to Make the Most of Changes
When’s the best time to buy?
Trick question. The economy is constantly changing. When the perfect time comes tomorrow, the one that seemed so good today, will no longer be the case.
The truth is timing the market perfectly is very, very difficult. Waiting for the stars to align can leave you missing opportunities in the here and now.
But there are some guidelines:
- Interest rates are coming down. If the BoE have recently reduced their base rate then lenders will be following suit to stay competitive. This is your window.
- Inflation is easing. Another clear signal lenders will loosen their criteria.
- Look out for end-of-quarter dates. Manufacturers and dealerships have monthly and quarterly targets. At the end of them, they’ll typically come with special financing incentives.
- Look at your personal situation. Can you afford a little extra each month? Don’t base a purchase decision on the finance rate. Buy the car you need.
Economic conditions will change, rates will fluctuate. But if you are informed and choose your moment, you can still navigate the changes and get the car finance that works for you.
