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UK Car Finance market report

Everything you need to make the right decisions

Providing the most comprehensive and up-to-date information and analysis of the Car Finance market, and the behaviours, preferences and habits of the consumer.

Mintel has the answers you’re looking for

What are the key challenges facing the industry and how fast are its rates of growth? Who is the consumer and what do they want? Where are the opportunities, where are the risks and what lies ahead?

Products covered in this Report

For the purposes of this Report, Mintel has used the following definitions:

The main financing options are HP (hire purchase), leasing or ‘contract hire’, PCP (personal contract purchase), and lease purchase. These products are distributed through dealer networks and other retail outlets, and are supplied by specialist motor finance providers and the finance arms of car manufacturers. Personal loans organised through dealers or manufacturers are also an option, although these are widely available through other financial institutions.

An HP agreement is a popular and traditional method of financing a vehicle purchase through a dealer. A typical HP agreement will usually (though not always) require customers to pay an initial deposit, typically between 10% and 30% of the purchase price. They will then repay the outstanding balance with interest as fixed monthly repayments over a set period of time, typically one to five years.

At the end of the contract period, ownership of the vehicle is transferred to the customer, subject to all payments and charges having been made. For new cars, interest-free HP deals may be available as part of a special promotion, but they tend to be for certain models, for a fixed term only and require a much higher deposit.

A PCP is a type of lease agreement which now dominates the car finance market. The customer is required to pay a deposit, followed by a series of monthly payments, typically lasting two to four years, which effectively cover the vehicle’s depreciation. Most come with an optional maintenance package, and vehicle tax is normally paid for the first 12 months.

A percentage of the total cost of the car, known as the MGFV (minimum guaranteed future value), is deferred until the end of the agreement period. The MGFV, which is set at the beginning of the contract by the finance provider, is based on the car’s estimated minimum value (or ‘residual’ value) at the end of the agreement, taking into account future condition and anticipated mileage.

At the end of the contract period, the customer has three options. They can hand back the vehicle with nothing more to repay or they can keep the vehicle by paying a final ‘balloon’ payment to cover the MGFV. Alternatively, they can part-exchange their current car against a newer one. The dealer will arrange to pay the MGFV on the customer’s behalf and any surplus amount left over (or ‘equity’) is used as the deposit on a replacement car.

All PCPs come with an annual mileage limit, which is used to determine the vehicle’s depreciation and therefore its residual value. Additional charges are incurred if the mileage limit is exceeded.

Contract hire is essentially a leasing agreement, where the customer pays an initial down payment then monthly rental payments until the end of the contract period (usually lasting two to four years) when they hand the car back. The monthly payments normally include vehicle tax for the duration of the contract and may include the cost of maintenance, although more commonly this is an optional extra. There is usually an annual mileage allowance, and customers who exceed their limit will incur extra charges (usually worked out on a pence per mile basis). On returning the vehicle, it will be assessed for wear and tear according to guidelines set by the British Vehicle Rental and Leasing Association. Any damage that falls outside of these guidelines may be subject to end-of-lease penalty charges.

A lease purchase agreement is a cross between an HP plan and a PCP. The customer pays a deposit, then monthly payments over a fixed term (usually two to four years). At the end of the contract, the customer pays a larger balloon payment – which is agreed upfront – and takes ownership of the vehicle. Unlike with a PCP arrangement, there are no mileage restrictions and there is no option to return the car at the end of the contract. The payments also do not normally include the cost of maintenance and other services. Lease purchase is often a popular option with people who know what vehicle they want to eventually own but are unable to access sufficient funds to pay outright for the new car up front.

A personal loan is the other main method by which customers can purchase a vehicle. In contrast to HP, PCP and leasing/lease purchase, a personal loan typically sees no involvement with a seller such as a dealer. However, in the analysis that is presented, loans arranged with dealers as intermediaries are illustrated.

Upon approval the amount of money loaned is passed from the loan company to the dealer with the buyer taking immediate ownership of the asset. Monthly payments are then made by the owner to the loan company to pay back the amount loaned.

Expert analysis from a specialist in the field

Written by Richard Shepherd, a leading analyst in the Financial Services sector, his extensive knowledge delivers in-depth commentary and analysis to highlight current trends and add expert context to the numbers.

The number of car finance contracts for new cars decreased in 2017, in the first period of real struggle since the market exploded at the start of the decade. In part, this is due to the cyclical nature of the product, with recent customers mid-contract and likely to return to market in the next few years. However, wider economic concerns could lead to consumers holding onto older cars for longer. Lenders need to ensure car finance continues to appeal to existing customers, while also addressing the issue of residuals by maintaining the expansion of PCP in the used car segment. Richard Shepherd
Senior Financial Services Analyst

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Table of contents

  1. Overview

    • What you need to know
      • Products covered in this Report
      • Executive Summary

          • The market
            • Growth in car finance contracts fell sharply in 2017
              • Figure 1: Forecast of value of car finance contracts sold through dealerships (private sector only) – Fan chart, 2012-22
            • Almost half of all sales are arranged through franchised dealers
              • Figure 2: Sales of new and used car volumes, by channel, 2013-17
            • Companies and brands
              • Dealerships dominate the car finance point of sale
                • Figure 3: Car finance providers used, March 2018
              • PCPs account for the vast majority of adspend
                • Figure 4: Total above-the-line, online display and direct mail advertising expenditure on car finance and leasing products, 2015/16-2017/18
              • The consumer
                • Two thirds of consumers own a car
                  • Figure 5: Car ownership, March 2018
                • 22% used car finance to buy their last car
                  • Figure 6: How people paid for the last car they bought or leased, March 2018
                • HP and PCP dominate the car finance market
                  • Figure 7: Type of car finance used, March 2018
                • Car dealerships have a stranglehold on distribution of car finance
                  • Figure 8: Sources of information used to research most recent car finance product, March 2018
                • Consumers are very confident that they understand their finance deal
                  • Figure 9: Attitudes towards current car finance product, March 2018
                • Borrowing for cars is still taboo for many
                  • Figure 10: Attitudes towards car finance, March 2018
                • What we think
                • Issues and Insights

                  • Use of consumer credit to access car finance is a worrying sign
                    • The facts
                      • The implications
                        • Understanding is high but there’s room for better education
                          • The facts
                            • The implications
                              • Subscriptions can satisfy young drivers’ demand for convenience
                                • The facts
                                  • The implications
                                  • The Market – What You Need to Know

                                    • Growth in car finance contracts plummeted in 2017
                                      • Car finance accounts for 88% of private new car sales
                                        • Car sales fell in 2017, while the FCA is continuing to investigate the car finance market
                                          • Almost half of all sales are arranged through franchised dealers
                                          • Market Size and Forecast

                                            • Growth in car finance contracts fell in 2017…
                                              • Figure 11: Volume and value of car finance contracts sold through dealerships (private sector only), 2013-17
                                            • …but the average value grew by 6%
                                              • Lending forecast to reach £49 billion in 2022…
                                                • Figure 12: Forecast of value of car finance contracts sold through dealerships (private sector only) – Fan chart, 2012-22
                                                • Figure 13: Forecast of value of car finance contracts sold through dealerships (private sector only), 2012-22
                                              • …supported by steady growth in volume
                                                • Figure 14: Forecast of volume of car finance contracts sold through dealerships (private sector only) – Fan chart, 2012-22
                                                • Figure 15: Forecast of volume of car finance contracts sold through dealerships (private sector only) – Fan chart, 2012-22
                                              • Forecast methodology
                                              • Market Segmentation

                                                • The market was reliant on used car sales for growth last year
                                                  • Figure 16: Volume and value of private car finance contracts sold via dealerships, segmented by new and used cars, 2013-17
                                                • Small increase in penetration of car finance
                                                  • Figure 17: Proportion of new private car sales bought with a car finance agreement, 2013-17
                                                  • Figure 18: Proportion of used car sales bought with a car finance agreement, 2013-17
                                              • Market Drivers

                                                • Car sales fell in 2017
                                                    • Figure 19: New and used car market volumes, 2012-17
                                                    • Figure 20: UK new and used car sales, by volume, 2012-22
                                                  • FCA investigation into car finance continues…
                                                    • …but a March 2018 update was encouraging
                                                      • Half plan to buy a car in the next three years…
                                                        • Figure 21: Intention of purchasing a car/s in the next three years, 2015-17
                                                      • …and new cars are most in demand
                                                        • Figure 22: Likelihood of new or used purchase, December 2017
                                                      • A base rate rise, but borrowing conditions remain favourable
                                                      • Channels to Market

                                                        • Almost half of all sales are arranged through franchised dealers
                                                          • Figure 23: Sales of new and used car volumes, by channel, 2013-17
                                                      • Companies and Brands – What You Need to Know

                                                        • Ford is the biggest manufacturer of new cars in the UK
                                                          • Companies are improving online and used car propositions
                                                            • PCPs account for the vast majority of adspend
                                                            • Market Share

                                                              • Dealerships dominate the car finance point of sale
                                                                • Figure 24: Car finance providers used, by sources of information used to research most recent car finance product, March 2018
                                                              • Ford is the biggest manufacturer of new cars in the UK
                                                                • Figure 25: Manufacturer shares of new car registrations, 2017
                                                            • Competitive Strategies

                                                              • Firms focus on developments in online services…
                                                                • Digital innovations are improving the customer journey
                                                                  • Manufacturers are developing their services to stay ahead…
                                                                    • …but are the tech giants the future of online car sales?
                                                                      • …and used car solutions
                                                                        • Peugeot looks to address residual stock
                                                                          • Payment Swap looks to serve mid-term PCP customers
                                                                            • Vertu Motors introduces online sales platform for used cars
                                                                              • More competition in comparison
                                                                                • Santander signs deals to provide finance for some British classics
                                                                                  • Drover and Drive-Hive introduce differing subscription models
                                                                                  • Advertising and Marketing Activity

                                                                                    • PCPs account for the vast majority of adspend
                                                                                      • Figure 26: Total above-the-line, online display and direct mail advertising expenditure on car finance and leasing products, 2015/16-2017/18*
                                                                                    • CarFinance 247 is the highest spending advertiser in car finance
                                                                                      • Figure 27: Top 10 advertisers of above-the-line, online display and direct mail advertising expenditure on car finance and leasing products, 2015/16-2017/18*
                                                                                    • Digital advertising is the dominant promotions channel
                                                                                      • Figure 28: Total above-the-line, online display and direct mail advertising expenditure on car finance and leasing products, by media type, 2017/18*
                                                                                    • Alternative credit products benefit from far higher, if falling, adspend
                                                                                      • Figure 29: Total above-the-line, online display and direct mail advertising expenditure on credit cards, unsecured loans and secured loans, 2015/16-2017/18*
                                                                                    • Nielsen Ad Intel coverage
                                                                                    • The Consumer – What You Need to Know

                                                                                      • Two thirds of consumers own a car
                                                                                        • 22% used car finance to buy their last car
                                                                                          • Car dealerships have a stranglehold on distribution of car finance
                                                                                            • Consumers are very confident that they understand their finance deal
                                                                                              • Borrowing for cars is still taboo for many
                                                                                              • Car Ownership

                                                                                                • Two thirds of consumers own a car
                                                                                                  • Figure 30: Car ownership, March 2018
                                                                                                • Used cars are slightly more common than new ones
                                                                                                  • Figure 31: Car acquisition, March 2018
                                                                                                • 38% of those who don’t own a car can drive
                                                                                                  • Figure 32: Car access among non-car owners, March 2018
                                                                                              • How People Paid for Last Car Purchase

                                                                                                • A quarter bought their last car with car finance, but savings are still key
                                                                                                  • Figure 33: How people paid for the last car they bought or leased, March 2018
                                                                                                • Some signs of confusion over car finance arrangements
                                                                                                  • Younger drivers and higher earners most likely to use car finance…
                                                                                                    • Figure 34: Use of car finance/lease agreement to fund most recent car purchase, by age and annual household income, March 2018
                                                                                                  • …which was used for 44% of new cars bought in the last two years
                                                                                                    • Figure 35: Use of savings and car finance/lease agreement to fund most recent car purchase, by type of car purchase, March 2018
                                                                                                  • A fifth used more than one source of funding
                                                                                                    • Figure 36: Number of sources of funding used to purchase last car, March 2018
                                                                                                  • HP and PCP dominate the car finance sector
                                                                                                    • Figure 37: Type of car finance used, March 2018
                                                                                                • Car Finance Research

                                                                                                  • Just 23% consulted a PCW to research finance options
                                                                                                    • Figure 38: Sources of information used to research most recent car finance product, March 2018
                                                                                                  • Recommendations can have a big impact
                                                                                                    • Figure 39: Sources of information used to research most recent car finance product, by age, March 2018
                                                                                                  • Half used just one source of information
                                                                                                    • Figure 40: Number of sources of information used to research most recent car finance product, March 2018
                                                                                                • Attitudes towards Current Car Finance Product

                                                                                                  • Understanding of terms is strong…
                                                                                                    • Figure 41: Understanding of current car finance product, March 2018
                                                                                                  • …but is everyone getting the best deal?
                                                                                                    • Figure 42: Response to the statement “I think that my current car finance contract is the cheapest way I could buy my car”, by socio-economic group, March 2018
                                                                                                  • 22% used unsecured credit to pay for a finance deposit…
                                                                                                    • Figure 43: Considerations when arranging last car finance product, March 2018
                                                                                                  • …but fewer than one in three considered it to buy their car outright
                                                                                                    • Repeat business to drive future growth
                                                                                                      • Figure 44: Response to the statement “I plan to use the same type of car finance that I have now to buy my next car”, by age, March 2018
                                                                                                  • Attitudes towards Car Finance

                                                                                                    • Borrowing for cars is still taboo for many
                                                                                                      • Figure 45: Attitudes towards car finance, March 2018
                                                                                                    • An opportunity to push packaged deals
                                                                                                      • Is car ownership on its way out?
                                                                                                        • Figure 46: Agreement with the statement “I would be happy to lease rather than own a car if it meant I could afford a better car”, by age, annual household income, and type of car owned, March 2018
                                                                                                      • New car owners have greater affinity for car finance
                                                                                                        • Figure 47: Agreement with attitudes towards car finance, by type of car owned, March 2018
                                                                                                      • Open Banking could appeal to some car shoppers
                                                                                                      • Appendix – Data Sources, Abbreviations and Supporting Information

                                                                                                          • Abbreviations
                                                                                                            • Consumer research methodology
                                                                                                            • Appendix – Market Size and Forecast

                                                                                                                • Figure 48: Forecast of private car finance plans (value) – Best- and worst-case scenarios, 2017-22
                                                                                                                • Figure 49: Forecast of private car finance plans (volume) – Best- and worst-case scenarios, 2017-22
                                                                                                              • Forecast methodology