As summer started, the used car market continued to make headlines with dramatic price increases. According to data from the AutoTrader Retail Price Index (a daily price analysis tracking over 900,000 vehicles), the average price of a used car was surging by >32% year-on-year on the back of 25 consecutive months of year-on-year price growth. While the year-on-year growth has started to cool a little in more recent months the impact on consumers, particularly those from lower-income households, remains profound.

The Disparity in Price Increases

One of the most striking aspects of the market has been the disparity in price increases across different types of vehicles. While the overall average price of used cars has risen significantly, the impact varies greatly depending on the car’s age and type, and has been felt most at the lower end of the price range.

For instance, the price of petrol saloon cars that are 10-15 years old has been increasing at a stonking rate of 5.4% per month. In contrast, petrol saloon cars aged 3-5 years old have seen a more modest monthly price increase of only 1.5%. So, the cost of older cars has increased an astonishing 360% quicker than newer models. This disparity highlights a critical issue: those with the lowest incomes are disproportionately affected by these price hikes.

The Burden on Low-Income Households

For low-income households, or those facing a number of other financial pressures, the rising cost of used cars is more than just a number — it represents a significant financial burden. These households are often forced to buy older, less reliable vehicles because they cannot afford newer models. As prices for these older cars increase, low-income buyers are pushed into a corner, facing higher costs for vehicles that are not only older but also more prone to breakdowns and maintenance issues.

This situation creates a vicious cycle. Lower-income individuals, who are often already paying higher interest rates on loans due to their financial situation, end up with cars that may require frequent repairs. The costs associated with maintaining these older vehicles can be substantial, straining already tight budgets.

The Poverty Premium in Action

This is a stark example of the “poverty premium”, where lower-income individuals end up paying more for essential goods or services. In the case of used cars, this means that those with the least financial resources are not only paying more but also getting less value for their money. The higher cost of maintaining older cars compounds the financial strain, leaving these individuals with less reliable means of transport.

The Broader Impact

The impact of rising used car prices extends beyond the individual. For many low-income families, a reliable vehicle is crucial for accessing employment, education, and essential services. Two-thirds of people in the UK are dependent on a car to get to work. As the cost of owning and maintaining a vehicle increases, these households may face additional barriers to economic stability and upward mobility.

Moreover, the financial strain caused by rising car prices can lead to a broader economic impact. When lower-income households are forced to spend more on transportation, they have less disposable income for other essential expenses, such as healthcare, housing, and education. This can contribute to financial vulnerability, ultimately leading to a cycle of financial instability and economic inequality.

Consumer Behaviour and Market Dynamics

Despite these challenges, consumer behaviour data suggests that confidence in the car market remains relatively strong. AutoTrader’s analysis shows that two-thirds of surveyed consumers still plan to purchase a car within the next three months. However, the budgetary constraints faced by lower-income buyers are evident. While the overall market shows resilience, the choices available to these consumers are increasingly limited.

Looking Ahead

As we move forward, the outlook for the used car market remains uncertain. While prices may stabilise, the current trends suggest that affordability will continue to be a significant issue, particularly for low-income households. Supply constraints and high demand are likely to keep prices elevated, though the rate of increase may slow, or even reduce to some extent.

Addressing these challenges will require targeted interventions to support the millions of people in the UK affected by financial exclusion. Ideally through the creation and supply of relevant financial services and products. Efforts to address the broader economic factors contributing to the affordability crisis will be crucial in supporting financial stability for all consumers.

TLDR

The surge in used car prices in recent years highlights a growing divide between different segments of the market. For low-income households, the impact is particularly severe, as they are forced to pay more for older, less reliable vehicles. The current market conditions underscore the need for targeted solutions to address the affordability crisis and ensure that all consumers have access to reliable transportation.

It’s vital that we look for innovative solutions to help address the problems the most vulnerable are facing. It is possible to design and build products that actively help people in financial difficulty. We must not leave behind those that need help the most.