LONDON – Automakers selling in the UK are extending the length of finance agreements to four years or more from the typical three, in an effort to spread out the increasing cost of new cars by lowering monthly payments.
The move will also help move stock that has gone unsold during the coronavirus lockdown and drum up new orders for when showrooms reopen.
Britain has one of the highest rates of financing in Europe among private buyers, at 91 percent, according to data from the Finance and Leasing Association.
As of April 1, PSA Group’s UK brand, Vauxhall, has started offering four-year lease and personal contract purchase deals (PCPs, also known as lease-to-buy).
“The reason PCPs are moving from 36 months to 48 months is that the cost of the technology on new-generation cars is higher, and manufacturers, with the exception of the premium brands, are unable to pass it in one fell swoop to the customer,” Steven Norman, managing director of Vauxhall, told Automotive News Europe. “Extending the PCP over a longer period is one way of making it more palatable.”
Personal contract purchases differ from conventional leases in that buyers have the option to make a balloon payment to buy the car at the end of the term, although few do. The arrangement essentially lets the customer pay for the depreciation during the finance period, rather than the whole car.
Norman said Vauxhall’s longer financing offer was not related to the collapse in sales due to the coronavirus, but rather “more fundamental about what’s going on in the motor industry.”
Data from Leasefetcher, a consumer aggregator site that pools lease deals on new cars, shows that four-year deals rose to capture 28 percent of the market in the first three months of 2020, up from 24 percent in 2019, while three-year deals fell to 37 percent from 42 percent.
“Manufacturers are starting to push longer-term deals to keep price-sensitive buyers interested in their offerings,” Will Craig, the founder of Leasefetcher, told Automotive News Europe.
However, the move to longer loan agreements means that buyers will change cars less often, potentially depressing sales in a way that is already happening in the U.S.
Data from market analyst Edmunds shows that the average loan term for a new car in the U.S. hit a record high of 70.6 months in March, with six years the most popular term length and seven years the second most popular.
Automakers selling in the UK prefer the personal contract purchase. It was used in 80 percent of private sales in the UK last year, according to FLA data.
“My previous experience of PCP is that it’s always been about three-year [terms] to try to get the change cycle as quick as possible, retain the customer and keep them in a car that’s relatively new all the time,” said Daniel Gregorious, head of sales and marketing for MG Motor in the UK since 2018, who previously worked at Renault.
MG offers four-year PCP deals on cars such as its big-selling MG ZS EV electric small SUV. “In terms of customers coming out of an existing car and getting into a new one with similar monthly payment and deposit, four years seem to work better in the industry at the moment,” Gregorious said. “We’d like customers to change more quickly, of course.”
Gregorious also cited Brexit and the drop in value of the pound that resulted from the decision in 2016 to split from the EU as another reason for stretching finance lengths. “As an industry, we’ve seen pricing going up. Clearly the indications around Brexit and exchange rate had quite an impact on car pricing,” he said.
The subsequent weaker UK economy has made buyers more price-sensitive and therefore less willing to tolerate higher monthly payments, said Craig of Leasefetcher.
“Uncertainty within the economy has driven this and was initially brought around by Brexit, now fuelled by US/China trade wars and coronavirus,” he said. “The consumer will be more careful with their money.”
Ford has been widely credited with popularizing the personal contract purchase in Britain, with its Options finance package offered via Ford Credit.
Such financing products will become more popular across Europe, Ford executives say. “Finance is very important, and it will become increasingly important as most people do not buy a car by walking in and putting [the full amount of] money down,” Ford of Europe CEO Stuart Rowley said in an interview in March.
The popularity of financing in the UK has become an additional drag on the economy during the coronavirus lockdown. The Finance and Leasing Association said it that by early April its members had received an estimated 526,000 Covid-related requests for repayment holidays, and had helped almost 60 percent of customers.
The Financial Conduct Authority, which regulates UK financial companies, on April 24 ordered automobile finance companies to provide a three-month payment freeze to customers “who are having temporary difficulties meeting finance or leasing payments due to coronavirus.”
One potential upside to the popularity of PCPs or leases is that most customers at the end of their arrangements return to showrooms, guaranteeing a stream of new sales as the UK contemplates ending lockdown for a greater variety of businesses, including auto dealers.