The car finance market in the UK

Roman Danaev

After five years of record growth, car sales in the UK seem to be flattening out, according to a report in the Guardian newspaper on the 5th of July 2017, quoting recent statistics released by the Society of Motor Manufacturers and Traders (SMMT) — during the second quarter of the year, new car sales actually fell by around 10%.

So far, however, these figures have not quelled speculation in some parts of the press and, indeed, the Financial Conduct Authority (FCA) itself, that the availability of car financing solutions is somehow overheating the market for motor vehicles.

In its report for 2016, for example, the Finance and Leasing Association (FLA) remarked on the concerns expressed by the FCA about measures used by lenders to test the affordability of finance that is made available.

The demand for car finance

Although there may be periodic fluctuations in the total of new car sales, the market continues to be buoyed by the second-hand market too. And the central role played by car finance in all these transactions is undeniable.

In its annual review, the FLA confirmed that some 80% of all new car sales are made via one of the many different types of car finance.

Indeed, the demand for that finance is so strong that the FT Adviser carried a story on the 14th of July 2017 that older purchasers are even turning to equity release on the homes they own in order to meet car loan repayments.

If the demand is so strong, making the car finance more difficult to obtain seems to flow against the inevitable tide of the market.

The diversity of the car finance market

The FLA reiterates its conviction that the diversity of the car finance market reflects the wide differences in customers’ — a needs and circumstances. It reflects a diversity of financing options which certainly leaves the prospect of equity release on the home you own as a very distant choice of last resort — whatever FT Adviser may say.

Those options, of course, include:

Personal contract purchase (PCP)

  • this is probably one of the most flexible finance options, since it leaves the customer with a final choice of whether or not to complete a purchase after having effectively leased a car throughout the agreed term;
  • by paying the previously agreed residual value of the vehicle at the end of the contract, you may own the vehicle, or just not make that payment, and return it to the finance company;
  • the sheer flexibility of a PCP helps to explain why it has become the financing option of choice for more than 75% of all UK car registrations, said Autocar magazine on the 2nd of May 2017;

Hire purchase

  • where PCPs may be a relatively modern invention, hire purchase is probably the most traditional;
  • after an initial 10% or so deposit, equal monthly repayments are made over the course of up to six years until the purchase of the vehicle is completed and ownership is transferred;

Personal loans

  • alternatively, you might choose to approach your bank or building society for an unsecured personal loan — with repayments spread over a similar period of time — and enjoy immediate ownership of your new or used car;
  • given the FCA’s regulation, and policies adopted by banks and building societies on lending, personal loans may be among the more difficult to secure.

The British motor car industry naturally relies on healthy sales of new and used cars. The demand for finance to facilitate those purchases is clearly very much alive and the motor finance industry continues to rise to meet the many and diverse challenges of supply.

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