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Chartered Trust comment

After several months of uncertainty it looks as if the industry can begin to look forward beyond its present difficulties.

The Government has issued its response to the Competition Commission inquiry; the euro is strengthening and conventional dealers are hitting back at the dotcoms with their own 'clicks and mortar' strategy.

But it would be wrong to become complacent. Transaction prices of new and used cars continue to fall with price guides marking most mainstream models down around 3% a month. That is well above the conventional 1% a month in happier times.

In a time of rapidly falling residual values it is not surprising dealers steer clear of finance products where there is an element of end-value in the car. In essence it is far easier to allow a customer to buy a car, even over an extended period, rather than lease or contract purchase and be forced to take a view on the residual two or three years down the line.

It has been noticeable, but perhaps not surprising, that even carmakers have been shy of promoting such products. With low interest rates and falling residual values a simple 0% finance, or a low rate HP deal, are far simpler to manage and control. They are also simpler to sell. Of course, different companies take different views on end-value risk. It is one of the main competitive differentiators between motor finance houses and their partner contract hire and leasing companies.

Take a conservative view and monthly rates may be higher - but you should have a happy customer at the end. Take a more aggressive view and you can lower monthly payments - shift the metal - but you may find the customer is less happy when the time comes to change. As residual values start to stabilise, these two views come closer together. When sold properly, contract purchase plans (PCPs) should always be a powerful weapon in the business manager's armoury.

Indeed there is an argument that PCPs are most valuable to the customer at a time of falling residual values. Remember, from the point of view of the dealer and the customer, the main risk is placed with the finance house or manufacturer.

This approach worked well for Rover during its recent troubled times. The company moved rapidly to restore customer confidence in the product by offering improved warranty, free maintenance for three years and a low deposit, high guaranteed future value finance plan. Buyers, quite literally, couldn't lose - and they realised it.

Such drastic action is only necessary in an extreme case. But it might well be time to dust off the PCP folder again. Customers will remain nervous about prices for some time to come and the comfort factor of a guaranteed end value will be important.

Plus, the core benefits of a PCP remain: the finance structure makes the car more affordable for the customer and gives you, the dealer, a powerful retention tool. That could have untold value in the face of all those internet sellers who will have sprung up (and, in some cases, gone bust) in the next three years.

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