Customers buying new cars will get loans from the taxpayer under a controversial plan to rescue the beleaguered motor industry.

Finance companies linked to the auto industry could be given access to the Bank of England’s multibillion-pound special liquidity scheme so that they can offer credit to buyers, The Times has learnt.

In a typical year motorists borrow almost £20 billion, helping to fund about half of all new car purchases, more than 1.2 million vehicles. However, credit arrangements offered by car companies and garages have dried up in the credit crunch. Unsold cars are piling up at factories and on garage forecourts and nearly all manufacturers extended Christmas shutdowns to around a month. Honda will shut down again for two months from February.

Car sales in November were down 36.8 per cent on the previous year – 100,333 compared with 158,735 for the month in 2007.

Gordon Brown and Lord Mandelson, the Business Secretary, want the Bank of England to make millions of pounds available to consumers to replace their existing cars.

Their plan is likely to anger critics, such as church leaders, who complain that the Government is encouraging households to spend money that they do not have to kick-start the economy.

Environmentalists said that the Prime Minister should be doing more to encourage people to switch to public transport.

Mr Brown said that the two issues facing the car industry were a shortage of demand and the availability of credit. “We have to look at what we can do so that that market doesn’t freeze in the way that other markets have,” he said.

On the day that Jaguar Land Rover announced 450 job losses, Lord Mandelson said that ministers were looking at what they could “appropriately” offer struggling carmakers to help them to survive the recession.

Industry sources pointed out that nothing in his loan guarantee package unveiled yesterday would directly assist them, and sources close to Jaguar said they were still waiting to hear about their plea for short-term help to ease cash flow difficulties. A meeting with the industry is pencilled in for the end of the month.

At Jaguar, 300 of the losses were managerial positions. The cuts bring the total number of employees taken off the payroll to 2,100 since the downturn began. Last week Nissan, which was Europe’s most productive car factory until the economic crisis, cut 1,200 jobs – nearly a quarter of the workforce at its Sunderland factory.

Lord Mandelson told the Commons Business and Enterprise Select Committee that talks were continuing with industry representatives over what assistance the Government could offer after the collapse in demand for new vehicles. “They are facing a serious loss of demand which, in the opinion of some in the industry, will never fully be restored. Be that as it may, we need to do what we can.”

He highlighted the research and development record of companies such as Jaguar Land Rover – now owned by the Indian conglomerate Tata, which has invested £480 million in new technologies. “I do not believe it would be right for anyone to stand by and see this sort of investment going to the wind,” he said.

Environmental groups said that any help given to the car industry, which has struggled to meet green targets, should come with strict conditions. Tony Bosworth, of Friends of the Earth, said: “The Government must make sure any financial help it provides is tied to the manufacturing and purchase of greener cars.”

Richard George, of the Campaign for Better Transport, said: “We don’t want to do the car industry down but it is a massive missed opportunity. At the same time as the credit crunch we have climate concerns. The Government could use Keynesian investment in low-carbon industries and public infrastructure.”

Paul Everitt, of the Society of Motor Manufacturers and Traders, said that car companies needed to sell vehicles to fund investment in the development of more fuel-efficient cars.

Lord Mandelson unveiled plans yesterday to guarantee up to £20 billion of loans to small and medium-sized companies to help them to survive the downturn. In return for a fee, the State will, in effect, insure banks against companies defaulting on loan repayments.

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