The way we buy cars today – the rise of individual contracts
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Tuesday six October two thousand fifteen will be a big day for the UK’s car industry.
We will learn how many cars were sold in September.
Figures from the the Society of Motor Manufacturers and Traders (SMMT) will be cracked down by manufacturer, model and type of engine.
So they should give us the very first indication of whether or not the Volkswagen emissions scandal has dented sales of its diesel engine cars in the UK.
If sales have fallen, the data will be sure to provoke suggestions that the German company, and maybe even the entire car industry, is all of a sudden staring into the proverbial abyss.
For several years now the industry has in fact been in rude health.
Fresh car sales in the UK have risen steadily since the beginning of 2012, following the fat slump caused by the excellent banking crisis a few years before.
Purchases reached a 10-year high of just under Two.Five million in two thousand fourteen and, Volkswagen possibly aside, they seem to be on course to grow even further this year.
There is a good reason for that.
The car industry has shown itself to be fairly innovative when it comes to ways of luring members of the public to open their wallets, or at least palm over their bank details, to buy a fresh car.
Making cars more affordable?
The main innovation has been a type of deal known as a individual contract purchase (PCP).
If you have not been interested in shelling out £15,000 to £30,000 for a fresh car in the past five or six years you may not have noticed this.
Once upon a time these sorts of arrangements, structured as rental or leasing agreements, were targeted just at businesses, especially the buyers of ample fleets of cars who wished fresh cars they could offload lightly after just two to three years.
But the fresh variation on this theme, the PCP, has been targeted at puny businesses and individuals.
It has become very popular, especially with those who want to buy a more expensive or up-market car.
Evidently more than 80% of Mercedes sales in the UK now take place via this sort of deal.
Toby Poston of the BVRLA, a trade figure for rental and leasing firms, says two things have driven this.
One is that the banking crisis compelled manufacturers to find fresh ways to stimulate car sales.
And then came the availability of very cheap finance, courtesy of the Bank of England’s policy of keeping interest rates very low.
“It’s all to do with the availability of cheap finance,” he says.
“These deals make cars more affordable for those who don’t have the cash or can’t take a loan. and give access to fresh, high quality vehicles.”
How they work
Albeit the terminology can vary from manufacturer to manufacturer, the PCP deals generally work like this.
You pay a deposit, make monthly payments for three or four years, and at the end of that you have a choice.
You can either buy the car outright with a final “balloon” payment, or you can forearm the car back to the dealer.
There is nothing very cheap about this however, and you can lightly be paying £300, £400, or even more each month, depending on the commencing cost of the car and the length of the deal.
The industry argues that these plans can work out cheaper than the more traditional form of borrowing to buy a car, called hire purchase.
Under that arrangement, the car manufacturer or someone else in the finance industry lends you the money.
You pay for the car in monthly instalments over several years, along with a hefty slug of interest, and at the end of the process the car is all yours.
‘A very good deal’
So popular have the fresh PCP deals become that, in the twelve months to July 2015, 705,000 people used them to buy fresh cars.
That was almost 59% of all private fresh cars sold in the UK during that period.
So what is the advantage, real or perceived?
One big attraction is that while you are driving around in your swanky, impeccable fresh car, the cost of servicing, maintenance and even accident repairs may still be borne by the manufacturer as part of the arrangement.
In other words, hassle-free driving; albeit you have to pay for it.
Breakdown costs, and even fresh tyres and windows, may be covered too, tho’ generally not the cost of your car insurance premiums.
And then after three or four years you can roll over the deal and pay for another fresh car in a similar style.
Garel Rhys, Emeritus Professor of Motor Industry Economics at Cardiff Business School, says: “Leasing plans present a very good deal for both companies and buyers.”
“It is very difficult to see what is wrong for the customer in this sort of thing.
“A C-class Mercedes can cost just the same as a Mondeo in terms of monthly repayments,” he adds.