Customers who have taken out personal contract purchase (PCP) contracts are not at risk of negative equity, according to automotive data firm cap hpi.
Negative equity can result in financial difficulties for consumers, but Andrew Mee, UK head of forecast at cap hpi, said PCP will not experience the same fate as other financial products.
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Mee said: “PCP is a really useful tool for motor manufacturers and dealers. From the consumer’s perspective, they are not really impacted in negative equity in the same way that they were years ago with other financial products, because if the market has moved so that the used value of the vehicle falls well below the guaranteed future value (GFV), they can just hand back the car and the risk passes on to the dealer or finance provider.
“In general, finance providers will set GFVs which price in an element of financial risk, to protect them against future losses.”
Current used car values are around an average of 5% higher than cap hpi forecasted a year ago, while most finance providers will generally price below the cap hpi forecast position by around -5% or -10%. Cap hpi said that this will give the finance providers a reasonable ‘cushion’ against unfavourable market movements.
The data firm explained that sometimes there are occasions where low-cost offers are made to drive registration volumes. However this will be done with knowledge of the expected financial impact at the contract end date and traded off against the benefit of higher immediate vehicle sales. Consumers are not at risk of negative equity because of this practice, according to cap hpi.
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By GlobalDataMee added: “If a consumer is in a position where the car has come to the end of the contract and is worth considerably less in today’s market than the GFV purchase price, they can simply hand the car back. Equally, they may decide that they like the car so much that they still want to purchase it and if they intend to run it until the end of its natural life, then today’s used value is irrelevant.
“Only a small proportion of consumers actually decide to purchase the vehicle at the end of the contract, because the majority of drivers are approached in advance of the contract end and are offered a new PCP deal, often deciding to ‘trade up’ into a higher model within the same brand or in some cases to a more premium manufacturer.”
