Car Finance - UK - May 2015
Introduction
 
The car finance market – like the wider car retail market – is currently experiencing strong levels of consumer demand. In 2014, around three quarters of new private car sales were paid for on finance arranged through dealers at the point of sale. In the new car sector, penetration has risen year on year since 2009, when the level was below 50%. In this report, Mintel identifies the factors driving this growth and considers the market’s prospects for further expansion. 

The report additionally provides an overview of the size and composition of the market, along with coverage of recent regulatory developments, industry innovation and promotional activity. The market analysis is complemented by the findings of Mintel’s latest online survey, which offers insight into consumer attitudes and behaviour in relation to car ownership and acquisition. It reveals the methods commonly used by consumers to fund a car purchase, and explores the likelihood of converting those who previously used dealer finance into repeat customers. Car buying and leasing intentions are also explored.

Product definitions and report coverage
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. 

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.

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 PCP is 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.

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.

Abbreviations
APR	Annual percentage rate	
AR	Appointed representative	
BCA	British Car Auctions	
CPI	Consumer Price Index	
CRM	Customer relationship management	
FCE	Ford Credit Europe	
FCA	Financial Conduct Authority	
FLA	Finance & Leasing Association	
GAP	Guaranteed asset protection	
GDP	Gross domestic product	
HP	Hire purchase	
LBG	Lloyds Banking Group	
LIBOR	London Interbank Offered Rate	
MGFV	Minimum guaranteed future value	
NMR	Nielsen Media Research. For further information, please contact nmr.communication@nielsenmedia.co.uk	
ONS	Office for National Statistics	
PCP	Personal Contract Purchase	
SMMT	Society of Motor Manufacturers and Traders	
SWOT	Strengths, weaknesses, opportunities and threats	
T&Cs	Terms and conditions	
VWFS	Volkswagen Financial Services	

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