Tom Horton, sales director of Zuto, the online broker, examines the shift of consumer habits towards personal contract purchase within the used car market and a need for the industry to focus on long-term engagement
For dealers, forecourt finance used to be fairly straightforward, offering a few key products with little competition from other finance providers. But the way that people want to own a car has drastically changed and so has the way that consumers are accessing finance.
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Customers now want the benefits and flexibility that rental agreements offer, but without losing the feeling that buying a car can bring. As a result the used car market is seeing a shift towards personal contract purchases as customers to look to benefit from the low payment options and flexible terms that they can offer.
PCP hasn’t messed about in making an impact, with the Finance & Leasing Association reporting that 57% of dealership offers are now down to PCP deals. Broken down into sales, PCP now represents £10.9bn worth of new cars and £3.9bn within the used car market. These ‘rental’ finance options provide a guaranteed value for the vehicle at the end of the agreed term and allow the customer to use the equity in the car as a deposit on a new one.
So why the big appeal? PCP caters to customers who are looking for a hire purchase agreement, but with lower monthly payments and without the commitment of buying the car at the end of the term. More importantly, they also offer flexibility in choice of cars – allowing customers essentially to get more car for their money.
However, as PCP continues to grow in popularity, dealers need to be cautious of promising ‘low monthly payments’ as a way to attract customers to hit monthly sales targets. Offering customers low payments might be a quick win in the interim, but in the long term it’s the customer who will ultimately pay the price – quite literally – as monthly payments that are too low can erode the final equity in the car, in addition to costly mileage penalties at the end of the agreement.
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By GlobalDataIt’s crucial that the contract period and the guaranteed end-value are balanced against when customers are going to change their car, as they should always have equity to use as a deposit when they look to trade in. This quick cycle also means PCP offers a chance for dealers and manufacturers to secure long-term repeat customers – they just need to balance the customers’ contract with a suitable term, low residual value and accurate projected mileage to do so.
Customers are also now savvier at researching their finance options online. In the first half of this year Zuto has helped tens of thousands of customers secure their finance upfront in order to get a better deal on the forecourt. However, there’s still a lot of confusion over the types of finance available, which is why the market needs to look at building long-term relationships that help support and educate, rather than battling to provide the lowest possible monthly payments.
From a dealer or finance provider’s perspective this open approach allows them to build a lasting relationship which is based on trust and value. For instance, current advertisements for PCP deals could leave customers out of pocket in the long run, pushing deals based on 6,000 miles per annum when the current mileage average tops out at just under 8,000 miles, (according to the RAC). The market will need to develop and maintain an open transparency if it’s to benefit from the long-term sales opportunity that this emerging customer segment represents.
An additional benefit to the industry is an increase in the ethical treatment of customers that PCP lends itself to. PCP agreements have to be spelt out clearly with any obligations from both parties completely understood. The simple transparency of the agreements makes any unethical treatment of customers difficult to hide. In addition, the perceived risk in taking out a PCP agreement is much lower from the customer’s perspective than simply buying a car outright. The customer is fully aware of the end-date of the agreement and any financial obligations are laid out clearly.
At Zuto we’ve built our whole experience around our customers, helping to guide them through the entire car buying journey. A big part of this is working with them to identify an affordable amount that they would like to borrow, and also educating them on the long term running costs associated with owning a car. In fact, the most popular cars that we finance show that UK car buyers are making decisions on the overall running costs of a car rather than the payment of the vehicle alone. They also clearly understand the savings of purchasing a used vehicle and the benefits of securing their finance upfront and heading to the dealer as a cash buyer.
PCP has grown very quickly in popularity within the new car market and it’s no stretch to see that it will soon outstrip other finance options in the used market before long. PCP and similar rental agreements already heavily dominate the American market and it seems a safe bet that the UK will follow suit as customers become more switched on to the benefits.
As an industry it’s imperative that we place the customer at the centre of deal negotiations and really examine what it is that they are looking for in order to develop a transparent and trustworthy process that will see the industry grow and benefit. <
