Car finance – the growth of PCPs


Andrew Ballard 1In my recent article, Driving Change: How Modern Consumers are Challenging the Status Quo in Car Retailing, I introduced the changing and evolving customer journey and role of the traditional car dealership as consumers increasingly take their journey online.

Here we look closer into the rise of car finance, and the reasons behind choosing this method to fund a new car. The growth in new car registrations remains fuelled by finance agreements and the dominance in PCP deals suggests that consumers remain content with the concept of financing their use of the vehicle rather than aiming to own it outright.

Setting the scene

Steady acceleration in new car registrations cemented 2015’s place in the record books, with car sales of 2.63 million across the United Kingdom, a figure that sits behind a welcome sense of industry optimism. This was reflected by Jaguar Land Rover reporting sales of over one hundred thousand for the first time, and McLaren Automotive reporting an increase of 250 jobs at its Surrey plant in January of this year – showing the UK remains a strong manufacturing and engineering base for the motor industry.

An increase in consumer confidence linked to low inflation and interest rates means that buying conditions are favourable. Taken together with lower fuel prices and the availability of credit, year-on-year sales are up. The FT canvassed Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, who reinforced the sentiment:

It is the same story we have been talking about throughout the year. That level of confidence… is certainly fuelling the market.

The unstoppable rise of Personal Contract Purchases

Unsurprisingly, the sales momentum has been a boom to the car finance sector. 2015 saw a 10% increase in new cars sold on finance, with the annual total reaching 984,077. Personal Contract Purchase deals, or PCPs, spearheaded this growth and now represent the majority of point of sale finance agreements. Largely exclusive to business transactions in the past, the method now dominates the consumer marketplace – and last year almost 76% of all new private cars sold in the UK were bought using PCP.

So why are we increasingly turning to finance to fund our new car?

Auto finance infographic - march 16Obviously a car is an expensive purchase, so the requirement for funding is not unusual. Those consumers who prefer a ‘one stop shop’ approach to shopping are choosing a car with an insurance and finance package bundled in, and the popularity of ‘just add fuel’ schemes is testament to that. With fewer decisions to make, precious time is saved in not shopping around for additional suppliers and the best deals. In addition, PCP contracts can include servicing and maintenance schemes, offering peace of mind and reducing the number of unforeseen and unbudgeted additional costs faced each year. And when the term is up, simply switch to a new car or pay the lump sum to make this car your own.

While most PCP deals are for three or four years, many customers elect to change their vehicle within term, with one manufacturer finding the average point their customers decide to upgrade their car is just 21 months. It’s a similar situation to upgrading a handset on a mobile phone contract – if a newer, shinier model is put in our reach, many of us will take it to keep up an image, keep up with technology, or keep up with the Jones’. And with cars often seen as statements of lifestyle or wealth, why not stretch for the best make or model to reflect that?

In general, attitudes towards finance and debt have shifted and it seems that consumers are less bothered about owning cars outright. In reality, you can put forward a deposit (for example a part-exchange vehicle) and fund the use of the vehicle over an agreed time for a set monthly budget. So with the trends showing an increased reliance on car finance, what could this mean for you? Contact your account manager or email us to discuss how working with Experian can allow you to explore potential opportunities further.