PCP accounts for more than 80% of the new car finance sold to consumers in the UK, but PCH is growing its share fast, mostly at the expense of hire purchase and personal loans. How do the main types of finance compare from the dealer’s perspective?
One of the main reasons for the growth in PCH usage is it can be cheaper than PCP for consumers, as Anthony Machin, the head of content at Glass’s, explained: “The recent rise in the uptake of PCH contracts is due to very low monthly instalments on non-maintained contracts. These often work out cheaper than PCP contracts.
“This only works if either the forecast RV is inflated or significant support is added at the front end of the contract.”
This expectation of lower prices can have a knock-on effect for the dealer, said Spencer Halil, managing director, Alphera Financial Services UK.
“Many PCH-funded cars earn the dealership a fixed commission, often only a nominal amount. But structuring PCH products with higher commissions often makes them uncompetitive in the eyes of the customer, particularly if they’re open to funding their car with a similarly priced PCP product.”
Halil said dealers do not see PCH-funded vehicles once the customer is done with them – they are returned to the lessor and usually sold at auction.
“On a broader scale, a glut of used lease vehicles sold at auction could reduce profitability of used car stock for everyone,” he added.
Stuart Foulds, the chairman and chief executive of TrustFord, said: “Retailers acquire vehicles from their manufacturer at a fixed price. The only variability in profitability between the two schemes would therefore be a result of a manufacturer bonus. A PCH may count for fleet bonus, but locks the customer into fixed terms. It’s feasible that a PCH could have more profit at the outset by not hedging that equity risk.
“More and more brokers are using PCH to get the price low and to avoid the T&Cs that PCP requires from regulators. It’s a hot topic as manufacturers intensify competition on lowest monthly payments.
“The gradual shift in favour of PCH is lengthening contracts to three or four years, and that could lead to a shortage of nearly new stock, making them relatively more expensive.”
Paul Burgess, the chief executive of Startline Motor Finance, said: “In the used market, at least as far as motor dealer point-of-sale finance is concerned, PCH doesn’t really exist at any scale. To develop a new product of this type and get it working well on a dealer basis would probably take both lenders and motor dealers quite a long time to establish.
“I think the PCP will morph into a PCH product over time, that’s a completely different proposition to the consumer. At the moment, manufacturers offer a discount level in the region of 40% of the ticket price of the asset, they can’t stomach offering that level on a bigger scale. The economics of PCH need to be worked out.”
Jerry Page, who until recently was the F&I director for Mercedes-Benz Retail, said: “There are only two products to fund a car and that’s hire purchase or lease. Everything else is a permutation of one of these, and PCP tries to straddle both. Badly explained, it muddies the waters with multiple end-of-contract options.
“PCP was invented to make monthly payments cheaper by paying only for depreciation as you go. It has the added advantage that the customer has to do something to decide what his options are near the end of the contract. Changes to the market mean that so many cars are now returned to the funder that the model, as originally conceived, doesn’t work the same way. And, for a customer, sold as neither one thing or the other, confusion can exist – some are expecting guaranteed equity in the vehicle to ‘go again’, some expect the balloon payment to be a payment to them; many hand back and get a recharge for damage and excess mileage like a lease. That doesn’t improve customer loyalty.”
Foulds added: “PCPs generally have lower final values built in to provide the customer with equity at the end of their agreement, (this is not generally a feature of PCH).”
Startline Motor Finance launched its used PCP just over a year ago, aimed at applicants who are declined, but with APRs and terms similar to prime lenders. With 50% penetration at some franchise dealerships, it reflects PCP’s momentum in the used market. For Burgess, HP and PCPs are very much the ‘mainstay’ in the used market.
Machin said: “Effectively, PCP works by looking at the difference in value between a car’s brand new price and the forecast value of a car at the end of the PCP term based on the annual mileage proposed by the customer. In a PCP finance agreement, it’s really important for forecast values to be as accurate as possible.”
Page believes the PCP could have ‘proper competition’ if lease and PCH become more flexible: “PCH for customers has one big disadvantage – the early termination clauses. Typically, 90% or 95% of outstanding rentals have to be paid plus handing back the asset worth more than originally planned.
“So why do customers decide against leases (in the form of PCH)? Are they ever mentioned as an option? Well, the US auto market functions perfectly well , with retention of customers encouraged with discounted or waived future rentals at the end of the lease in exchange for a new one.
“Customers could be given the option to swap after three or six months. A five-year lease could incorporate regular asset swaps, for example. You could have an SUV for the winter and a soft-top for the summer. The cars handed back create a bigger market for nearly new cars.”
Halil agreed: “PCH products simply don’t offer this level of flexibility , resulting in longer change cycles.”
Machin said: “PCH usually has higher monthly payments than PCP, however, for the customer there is greater flexibility to switch provider and the total cost can work out lower as the monthly payments can include service and maintenance costs.”
Halil said: “The flexibility of PCPs is intrinsically linked to profitability for retailers. Where PCH products are relatively inflexible and tie customers into a multi-year deal, PCPs offer car buyers the advantage of three settlement options.
“They can hand the car back, part-exchange it for a new vehicle, or buy it outright at the end of the term. PCP also offers dealerships the chance to sell returned vehicles.”
Foulds said: “While PCH may suit some fleet & business users, the PCP is generally more attractive to retail customers who want the benefit of flexibility. Customer circumstances change, affecting their expected mileage and usage. Many choose to change their vehicles during the term of the contract. Our experience in TrustFord is that the average contract term is roughly 27 months’ duration. Not many people will have taken a contract out over that term at the outset, so flexibility is important.”
Paul Burgess, the chief executive of Startline, said: “PCPs offer more flexibility to the customer, making repayments more affordable because of the substantial residual payment at the end of the agreement. From the dealer’s perspective, if there’s enough equity at the point it ends, they naturally roll into another agreement.
“For consumers thinking of buying new, it’s not as straightforward as before, because the cost has gone up. There’s not the same support for UK PCP deals.”
Add-ons such as GAP insurance or alloy wheel cover could be affected with PCH, according to Halil: “PCH customers are likely to have to pay for these options separately, rather than bundling them with the vehicle operating lease. This creates a multiple payment profile for customers, with the added complexity putting many off.”
All Trust Ford value-added products and services are available on a PCH for retail customers. Foulds said: “All new cars require servicing and service contracts are available regardless of funding method.”
Foulds thinks fixed-price ‘renting’ could be an option where the customer is on a rolling programme with all-inclusive servicing and car tax, already being trialled by some manufacturers.
Page believes by adopting more flexible PCH products, the need for add-on products could be stronger because vehicles will need to be returned in a certain, agreed condition.
Halil said: “Dealers selling vehicles with a PCP have a clearer opportunity for upselling, because it’s possible to roll the cost into a single monthly payment.”
Machin drew attention to obligations under the Financial Conduct Authority (FCA).He said: “Dealers need to have clear documentation and processes around treating customers fairly, complaints procedures and financial promotions for their website and social media activity in order to receive and maintain consumer credit permissions.
“When a customer signs a dealer finance contract, it will usually allow the salesman to earn additional commission on top of the commission they receive for selling the car.
“However, fears still thrive that the minority of car dealers fail to explain the drawbacks of using finance to buy a car.”
Despite its limited appeal to new vehicle customers, with less than 5% funding vehicles using HP, Foulds believes it is important to retain the option.
Halil agreed: “It’s far and away the easiest car finance product to understand. For retailers selling lower-value cars, or for customers who may want to keep the car for longer than two or three years, HP makes a lot more sense than PCPor PCH.”
Burgess, too, concurred: “I think there will always be a place for hire purchase. On a £5,000 or £6,000 car, the residual value may not be enough to lower the monthly payments significantly . But also, it’s about choice. Not everyone wants a PCP.”
Page suggested: “Maybe an old friend – HP with a balloon (not to be confused with lease purchase) – is due to be recalled to active service. At the end of the agreement, you would pay it off or take a loan to pay it off. There’s no ambiguity.”
Summing up all the schemes, Machin said: “HP has fallen out of favour recently with many customers and dealers. PCP and PCH schemes continue to be a fashionable means of financing new car purchases as manufacturers and finance house continue to heavily promote these schemes.
“The used car market has been very strong in recent years and as long as this continues, there are no reasons for RVs to be negatively affected by these finance packages.”