What you need to know
The UK consumer car finance market has performed well in recent years, with growth outstripping the wider car market. In 2018, nine out of 10 new car registrations in the private sector were arranged using finance at the point of sale. Penetration is much lower in the used car market, but it is increasing. Mintel’s Report examines whether the market will continue to grow in the face of falling car sales, and identifies the expected growth areas.
Along with examining new business prospects, the Report explores the core trends that are shaping the market, such as the shift from car ownership to ‘usership’, and the move towards ‘greener’ solutions. It additionally investigates recent regulatory developments and innovations, such as all-in-one subscription and new digital sales platforms, which allow prospective car buyers to view finance deals alongside car listings.
The market and company analysis is complemented by the findings of Mintel’s consumer research, which identifies those who are likely to be in the market for a new or used car within the coming year, and provides insight into their preferred channels and buying methods. It also identifies consumers who have used particular types of car finance before, such as hire-purchase, personal contract purchase and contract hire, and reveals whether they would use them again.
Report coverage and product definitions
The focus of this Report is on 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 www.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 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.
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 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 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.
