55% of UK drivers say their car has become even more vital to them than it was before the coronavirus pandemic and 42% are using their vehicle more regularly since the start of the outbreak. Mintel’s research also shows that driving habits are changing, with people using their cars less for commuting and more for shorter essential and leisure trips.

Yet COVID-19 has severely hampered demand for car finance over the past year. New car finance agreements taken out at the point of sale were down by a fifth in 2020, correlating with a sharp fall in both new and used car sales during the pandemic. Lockdown restrictions and consumers delaying major purchases were the main contributory factors to the decline.

In contrast, car subscription services – which are viewed as a potential future threat to car finance arrangements – have benefited from the recent change in driving habits, with providers reporting soaring demand. Nevertheless, Mintel’s research shows that the majority of drivers still prefer to ‘own their own car’, with most dealer finance solutions providing that option.

The car finance market will rebound over the next few years, not least because most consumers view their car as an essential mode of transport. There is likely to be a fair amount of pent-up demand, which will help drive the recovery, along with increased interest in green cars. 41% of drivers who are planning a car purchase within the coming year expect to opt for a hybrid or electric model. This is a positive trend for providers of point-of-sale finance. As green vehicles tend to be more expensive than traditional models, this could potentially prompt more eco-conscious car buyers to consider buying on credit.

• The impact of COVID-19 on the car finance market and the wider car retailing market.

• How driving habits have changed over the past year and whether these will prevail post-pandemic.

• Consumer intentions to buy a new/used car, roughly when and what type of vehicle.

• Attitudes towards car ownership and interest in car finance solutions.

The first COVID-19 cases were confirmed in the UK at the end of January 2020, with a small number of cases in February. Rapidly rising case numbers led to the first national lockdown, starting on 23 March. It was not until 15 June that non-essential stores were allowed to reopen, followed by pubs, restaurants, hotels and hairdressers on 4 July and many beauty businesses on 13 July.

By September, it had become clear that the UK was at the start of a second wave, and social-distancing measures were intensified. Continued increases in infection numbers led to Wales implementing a two-week national lockdown from 19 October, England announcing a month-long lockdown from 5 November and Scotland introducing a new five-level system of coronavirus restrictions. However, despite these restrictions, case numbers continued to increase. All four UK nations tightened restrictions in January 2021, effectively leading to a third full UK-wide lockdown.

On 22 February, Boris Johnson announced the roadmap to an easing of restrictions in England, starting with the reopening of schools on 8 March, followed by easing of restrictions on outdoor gatherings on 29 March, and with a hoped end to all restrictions by 21 June. The Welsh and Scottish governments also gave more details on their plans to ease restrictions, with both nations taking a slightly more cautious approach to the one planned for England. In England, there is a four-step approach comprising:

• Step one, on 8 March, schools reopened, and two people were allowed to meet outdoors socially and from 29 March, outdoor gatherings of either six people or two households were allowed and outdoor sports could resume

• Step two saw shops, hairdressers, gyms, zoos and theme parks reopen from 12 April and outdoor hospitality resume

• Step three started on 17 May, with most social contact rules lifted, as well as limited mixing indoors

• Step four, it is hoped that, on 19 July (extended from 21 June previously), all legal limits on social contact will end, although there is still some uncertainty attached to this.

The UK’s vaccination programme started on 8 December, 2020, and with the Pfizer-BioNTech, Moderna and Oxford-AstraZeneca vaccines licensed for use in the UK, the government aims to offer a first dose of the vaccine to 32 million people by mid-April and for all adults to have had their first jab by the end of July 2021. As at early June 2021, the UK is on course to meet this target. While concerns remain over the efficacy of existing vaccines to new strains of the virus and the disparity in vaccine availability across the globe, there are, at least within these shores, finally reasons for optimism.

Mintel’s economic assumptions are based on the Office for Budget Responsibility (OBR)’s central scenario included in its March 2021 Economic and Fiscal Outlook Report. After the fall of 9.9% over the course of 2020, the scenario suggests that UK gross domestic product (GDP) will grow by 4% in 2021 and 7.3% in 2022.

GDP is not expected to return to pre-COVID-19 levels until the second quarter of 2022, although this is six months earlier than the OBR forecast in November 2020, mainly because of the faster-than-expected roll-out of vaccines.

Unemployment is expected to peak at 6.5% in the fourth quarter of 2021. As with GDP, this is more positive than the OBR’s November forecast, but the OBR does raise the prospect of long-term scarring on employment, especially in the more exposed retail and hospitality sectors.

The focus of this Report is on car finance products sold to consumers at the point of sale, the most popular of which are hire purchase, personal contract purchase and contract hire agreement. 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. They are also available to car buyers through online car dealers and brokers.

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 one to five 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.

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.

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 Guaranteed Minimum Future Value (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.

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 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. On returning the vehicle, it will be assessed for wear and tear according to guidelines set by the British Vehicle Rental and Leasing Association (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.

Mintel draws on data provided by the Finance & Leasing Association (FLA) to show the volume and value of consumer car finance contracts sold at the point of sale. This covers PCPs, HP/conditional sale, PCH/leasing 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 www.fla.org.uk.