UK Car Finance market report
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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.
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Covered in this report
For the purposes of this Report, the point-of-sale car finance market, like the wider car retail market, is divided into two main sectors: new and used.
The main financing options are hire purchase (HP), leasing or ‘contract hire’, personal contract purchase (PCP) 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 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 is becoming more popular with new car buyers. 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 minimum guaranteed future value (MGFV), 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, 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 Patrick Ross, 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 car finance market has grown at a frenetic pace since the recession, supported by low interest rates and the popularity of affordable Personal Contract Purchase (PCP) products. The shadow of an upcoming FCA investigation into fairness is now looming, and new cars are expected to lose their shine over the next few years. Under-explored opportunities lie in used car finance, online distribution and leasing.
Senior Financial Services Analyst
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