Brexit: how will it affect car costs?

Weaker pound likely to mean higher cash and finance costs, despite UK-EU trade deal, with additional paperwork needed to drive abroad

Nick Gibbs
Jan 4, 2021

Will Brexit make cars more expensive?

It is likely that Brexit will result in new cars being more expensive - both to buy outright and to finance - though the impact on used car values and monthly payments is harder to gauge due to changes in second-hand car pricing following the coronavirus outbreak.

Despite a trade deal having been arranged at the last minute between the UK and the EU in December 2020, this has been criticised by the leader of the Labour party, Keir Starmer, for being a 'thin' agreement, as it doesn't cover much of the UK's trade, making it very difficult to understand the full consequences of the UK's decision to leave the EU.

However, what is known is that the value of the pound dropped significantly following the result of the vote in 2016. From a high of 1.40 euros to the pound in November 2015 - seven months before the vote - and 1.32 euros to the pound a month ahead, the pound was only worth 1.12 euros four months after the referendum, as the impact of the vote began to be understood. Fast forward four years and the pound is only worth 1.11 euros.

The relevance of this? Anything purchased in euros on paper is now effectively around 25% more expensive. Considering that many parts in UK cars are sourced from the EU - or even move backwards and forwards across the border many times - this could lead to increased costs for British drivers purchasing new cars. It could also mean that repair bills become more expensive, too, as parts themselves go up in price.

Higher costs likely despite trade agreement

Though the UK has agreed a tariff-free setup with the EU - which means that neither side charges high taxes for cars or parts to be shipped across the border - this may change in future, and additional paperwork and checks are now needed. This means that the time taken, and consequently the cost required, to import goods is likely to go up further. As a result, you can expect import costs to go up for business and a subsequent hike in many of their prices.

The majority of cars sold in the UK are imported from the Eurozone and with the value of the pound having fallen dramatically against the euro, the bulk of car manufacturers selling in the UK are now making less money from each car sold, especially those that import the most, namely the VW Group, Ford, PSA (the parent company of Peugeot and Citroen) and Vauxhall.

PSA was the first to say it would have to put prices up after the Brexit vote at the end of June 2016, but did not do so immediately. The only maker to raise prices in the days after the vote was is Ford, which increased those for the S-Max and Galaxy people carriers. However the maker said that wasn’t Brexit-related. “That’ll have been in the planning before Brexit,” a Ford spokesman stated at the time.

Manufacturers typically held off raising prices immediately following the vote to see whether the situation settled, according to market analyst JATO Dynamics. “There’s not been any massive change as most brands are waiting to see if the exchange rate returns to previous levels,” the company said in a statement.

Since the pound is even weaker against the euro at the turn of 2021 than it was immediately following the vote, it's highly likely that new cars in the UK will become more expensive in 2021 than they would have been without Brexit. It remains to be seen whether the additional costs caused by additional checks and paperwork due to Brexit result in higher costs being passed on to drivers.

Will Brexit affect car finance prices?

With so much uncertainty - even after a basic Brexit agreement has been lined up - there are still significant question marks over the value of used cars; something which has a dramatic impact on both new car PCP finance monthly payments - since a £20,000 car that is worth £12,000 after three years would cost less per month than an equivalent worth £10,000 after the same period - and used car values.

Should used car values drop as the impact of Brexit is better understood, this would be good news for those buying or financing a used car - as the car would cost less to begin with - though those financing a new car with PCP finance - the most popular type of finance for new cars - could expect higher monthly payments.

Confusing the situation, the coronavirus outbreak, which took hold in the UK in 2020, has increased the values of a large proportion of used cars, as many commuters choose to purchase an affordable car for getting to work, rather than relying on public transport, where there is a higher chance of catching coronavirus.

Immediately following the referendum result, the finance and leasing industry saw no major change in monthly payments post Brexit, according to industry experts, though most contracts taken out in 2016 would have come to an end before Brexit fully came into force in 2021 anyway. Shortly after the outcome of the vote the industry reported that prices fell slightly, but that was more likely to be a seasonal effect rather than due to Brexit.

Leasing and PCP finance monthly payments are a good general indicator of manufacturer thinking about the market, because they can be changed without altering the list price of a car. Prices were set quarterly before the referendum and that practice is expected to continue after Brexit.

Finance deals were good value before the vote as interest rates were low, and following the vote the Bank of England base rate for interest - which has an impact on the rates that lenders choose to charge - was cut to a record low of 0.25% in an attempt to prop up the economy. Following this they were subsequently dropped to just 0.1%. Rates are likely to stay low as the value of the pound remains weak.

Will insurance prices change after Brexit?

Immediately after the referendum result it was "business as usual" according to a spokesperson for the Association of British Insurers (ABI), but there are changes now Brexit has come into force. Drivers now need a 'green card' from their insurer to prove that they are covered to drive in Europe, which they will need to request at least six weeks before they plan to travel. If you are towing a trailer or a caravan, you will also need a separate green card for this.

Be aware, however, that the green card only proves that you have the most basic level of insurance legally required to drive in the EU - third-party cover - which will not cover damage to your vehicle if you're involved in an incident. So, just because you are able to get a green card doesn't mean that you have the same level of cover in the EU that you have when driving in the UK.

Do also bear in mind that you'll need to have GB stickers on your car to drive in the EU, unless you have GB and a Union flag on your number plate (though this doesn't apply in Spain, Cyprus and Malta). You'll also need to carry your the V5C 'log book' to prove that you own the car. If you're financing or leasing the car - meaning that you're not the legal owner - you'll need to request a VE103 form from the finance company, to prove that you have permission to take it out of the country.

Another potential impact in time might be a reversal of the 2012 EU-led directive that makes it illegal for insurers to charge men more than women for car insurance. That pushed up insurance for women, who insurers generally regarded as a lower risk then men, and reduced it for men. The British government at the time was opposed to the regulation, fearing it would push up all premiums in a “risk-averse” business. However the ABI has said average car insurance premiums have remained broadly similar.

 

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