COVID-19 poses an immense challenge to the car finance market in 2020. Lockdown closed all car dealerships for at least 10 weeks, cutting off the primary channel for car finance sales. Activity will be severely restricted while social distancing rules (even reduced ones) remain in place. Additionally, the economic downturn resulting from the outbreak will affect consumers’ ability to afford to upgrade/replace their cars or get new ones. Even people who have not seen disruption to their income will be cautious about making big purchases in times of high uncertainty.

However, the automotive industry as a whole will be anxious to boost sales, with the government promising to do whatever it takes to help the economy. Even while the lockdown is still ongoing dealerships are already offering good deals. People who are in a position to buy will be picky about their choices.

• The impact of COVID-19 on market performance and dynamics in the car finance sector.

• How COVID-19 will impact consumer behaviour, product and channel preferences.

• Analysis of competitive strategies and innovation.

• Consumer car buying activity and future intentions, including funding methods and a comparison between plans in 2019 and 2020.

The focus of this Report is car finance products sold to consumers, as opposed to business customers.

Mintel draws on data provided by the Finance & Leasing Association to show the volume and value of consumer POS (point-of-sale) car finance. This covers PCPs, HP/conditional sale plans, lease agreements and car loans sold to consumers through dealerships. Some FLA members may also include business written through third parties, such as online dealers and brokers. For further information, please see fla.org.uk.

Product definitions are as follows:

• HP (hire-purchase) is a hiring agreement between a customer and a finance company secured on the vehicle, where the customer has the option to own the vehicle, typically at the end of the contract term. The customer may pay an initial deposit (eg 10-30% of the purchase price) either in cash or by trading in an old vehicle as part-exchange. The outstanding loan, normally subject to interest, is then repaid over a pre-agreed term (typically 1-5 years) in fixed monthly instalments. The customer gains ownership by paying an additional sum called the ‘option to purchase fee’, subject to all contracted payments having been made. There are no mileage restrictions with an HP agreement.

• PCP (personal contract purchase) similarly involves the customer paying a deposit, followed by a series of monthly instalments over an agreed term. However, the key distinguishing feature of this product is that the residual value of the car (ie the expected value at the end of the contract term) is guaranteed at the start – referred to as the GMFV. Customers need to agree upfront an annual mileage limit, which is used to determine the vehicle’s depreciation and its GMFV. Additional charges are incurred if the mileage limit is exceeded, or if there is any damage to the car. At the end of the contract period, the customer has three options: they can hand back the vehicle, take ownership of it by paying a final ‘balloon’ payment to cover the GMFV or trade it in for another.

• Conditional sale is a sub-set of HP, except the customer automatically owns the vehicle at the end of the contract term. Another product variant is ‘conditional sale with balloon payment’ which involves making lower monthly payments and then a larger final ‘balloon’ payment at the end.

• Lease purchase is similar to HP or conditional sale, except that payments are structured like a lease agreement where the customer makes a number of payments in advance rather than a deposit.

• Fixed-sum loan is a special type of loan, where the car is written into the agreement as an asset. This means that the customer will have lender support should things go wrong with the vehicle within the first six months of purchasing it. As with a traditional unsecured loan, the customer takes ownership of the car from the start. However, the car cannot be sold until the loan is repaid.

• PCH (personal 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 2-4 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. On returning the vehicle, it will be assessed for wear and tear according to guidelines set by the BVRLA. Any damage that falls outside of these guidelines may be subject to penalty charges.

• An unsecured personal loan from a bank, building society or other lender is the main alternative to taking out a car finance agreement at the point of sale. Subject to credit checks, they are granted for any personal use and are available for varying amounts (typically between £1,000 and £25,000). The customer repays the capital, plus interest, in fixed monthly instalments over a pre-agreed term (normally between one and 10 years). One of the main benefits of using an unsecured loan to pay for a car is that the customer takes ownership of the vehicle from the outset. Note, some car finance companies also offer personal loans via dealerships.