This post was written by Tim Hill, Head of Business Development
Following its introduction as a method of financing a new car back in the 1980’s, PCP (Personal Contract Purchase) has become the mainstay of the new car private buyer, with virtually all manufacturers offering this method as the best way for their customers to buy their new car. In fact, the manufacturers tend to focus all their new car offers around this form of funding as it creates a more defined change cycle for car buyers and can help build brand loyalty. Why then, since early 2017, has the spotlight been turned onto PCP car financing as the next financial disaster waiting to happen?
Both the FCA (Financial Conduct Authority) and The Bank of England have raised concerns over the sharp increase in the number of consumers buying new cars via a PCP finance agreement with shouts of ‘irresponsible lending’ and ‘lack of transparency’ leading the call for more stringent regulations around consumer lending. In an article by Tom Sharpe of AM Online in March 2017 (“Fears PCP boom could prompt crash similar to US mortgage crisis”) the author writes: “Some industry commentators fear sub-prime lending could catch customers out in an economic climate where currency fluctuations and the effects of Brexit could prompt a fall in residual values.” However, the availability of sub-prime PCP is minimal, with hardly any lenders looking to offer this product to the sub-prime market.
So, is PCP really the potential problem it’s being made out to be, or is this just another example of scaremongering from people who don’t really understand the motor industry and its continuing ability to innovate new products to drive growth in one of the most competitive industries in the world?
Of the 1.2 million private new car registrations in 2016, 1.4 million buyers used the dealers POS finance offers. Some sources suggest that 9 out of 10 of these finance agreements are PCP’s. So just why is that? Well, the other dealer options available for financing a new car range from HP, Lease Purchase or PCH (Personal Contract Hire).
HP would normally result in a much higher monthly repayment than PCP as there isn’t any of the capital cost deferred until the end of the agreement, as such the consumer would be paying for the whole vehicle over the term and, unless they were prepared to put a much larger deposit down or take out a much longer loan term, this would take the monthly payments out of reach for most consumers.
Whilst Lease Purchase does defer some of the capital cost until the end of the agreement this balloon amount is not a guaranteed minimum value for the vehicle and the consumer must pay this figure even if the true value of the vehicle is less. This, of course, is not an attractive proposition for them.
PCH is starting to become more appealing to some consumers as it does give them a fixed monthly payment to budget from for the term of the agreement, however, this type of agreement doesn’t have the option to keep the vehicle at the end of the term and it can also be very expensive should the consumer need, or wish, to change the vehicle mid term.
Alternatively, the buyer could choose a personal loan from a bank or top up their mortgage. However, one immediate downside of these options would be that they would no longer benefit from the finance deposit contributions widely offered by the dealers finance options. Additionally, opting to purchase the car by either of these methods takes away the increased statutory rights a consumer enjoys by financing through the dealer such as quality issues with the vehicle, early termination rights and repossession rights.
So, PCP emerges as the most favourable method of funding for the consumer when buying a new car as it combines all the benefits of deposit contribution, usually a subsidised interest rate, a deferred amount that the lender will guarantee will be no higher than the vehicle’s value at the end of the term, a lower monthly payment than alternative methods, enhanced statutory rights, a shorter change cycle with the ability to change mid term if required.
So, if the benefits to the consumer of financing via a PCP agreement are clear, why are the Bank of England and the FCA so concerned? The Bank of England appear to favour more stringent regulation leading to stricter affordability checks whilst the FCA’s business plan published in April comments on ‘‘a lack of transparency, potential conflicts of interest and irresponsible lending’’. The FCA further comment: ‘‘Households are vulnerable to any potential shocks to their employment, income or debt servicing’’ but hasn’t that always been the case over the past 30-40 years?
Yes, responsible lending is a must but there is always a need for balance in all things. Cars are no longer the luxury purchase of 40-50 years ago, they are more of a necessity now than ever, but they are both aspirational and emotional purchases. We all want to have the best car we can afford, but affordability isn’t just about the price of the car, it’s about the running costs of it also. New cars come with 3 years or more manufacturers warranty, 1 or more years breakdown cover, lower CO2 emissions and ever more economical fuel consumption. They also generally have better safety features than older vehicles, with the result that the overall cost of running a new car can be significantly lower than running an older one.
As Adrian Dally, FLA Head of Motor Finance, argues, the market is ‘’stable’’ and adds “I think people are acutely aware of what happened in 2008. Back then credit and liabilities were held by people who didn’t know who they had loaned to, but that isn’t the world we live in now.”
People will always want to buy cars, and to get the most car for their money. It seems to me that PCP provides that solution, and as long as it’s sold ethically, with full transparency around mileage limits and condition, I believe that PCP should, and will, remain the most suitable method for buying a new car for many years to come.