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Personal contract hire: ‘Huge opportunity’ for personal contract hire

Contract hire has long been the finance tool of choice for fleets, while personal contract hire (PCH) has remained a niche product for private users, offered by just a handful of dealers.

But times are changing and motor retailers are becoming more aware of the benefits and profits of PCH.

Unlike America and, to a lesser extent, mainland Europe where the leasing market is more widely accepted and people are happy to rent cars for fixed periods and hand them back, the British have been slow to warm to PCH.

Peter Cottle, senior director at Capital Bank, one of the country’s largest backers of PCH, predicts that personal contract hire will keep getting bigger.

“There’s a huge opportunity for dealers as people become more accepting of leasing cars,” he says.

“It’s all about a mindset change. Traditionally people want to own cars but realistically they rarely end up actually owning the car if they buy it using PCP – they just change it.”

PCH is essentially the same as contract hire for fleets. The only difference is that private individuals cannot reclaim the VAT, which is built into monthly payments.

Customers benefit from fixed cost motoring over a set period of time, often allowing for a more expensive car than they could otherwise afford. Furthermore, the supplier takes on the residual value risk, rather than the customer.

PCH agreements, which are between the individual and the finance company, can be provided for any car. The dealer picks up a commission, which varies depending on the deal agreed on.

Cottle says that though the profit margin varies, the structure of PCH allows dealers to control the sale better: “Discounts don’t have to enter into conversation, they’re not even an issue.”

#AM_ART_SPLIT# Unlike Lex, which is waiting to see how successfully PCH is adopted by consumers before advertising it more aggressively, Capital Bank is marketing its PCH scheme through a small number of dealers who are committed to the product.

“It involves a lot of training and commitment for the dealership,” explains Cottle. “You can’t just put it out there and hope that it will sell itself. Your staff need to be 100% behind it.”

Colin Tourick, leasing industry expert, says: “Most brokers make between £600 and £800 per car. People like Ling Valentine, whose prices are very competitive, are taking less money.

Essentially she doesn’t charge the lenders as much as other brokers.”

A further benefit of PCH is that customers receive an added value product that offers comfort because it is just paid for, used and handed back. No road tax is payable and though additional maintenance contracts are offered they are not essential as the car is covered by the manufacturer’s warranty for the first three years anyway. If there is a service that needs to be done it is often cheaper for customers to fund this themselves, rather than opt for the maintenance contract.

One potential pitfall is the mileage limitation which customers must agree to, usually 10-, 15-, or 20,000 miles per year. If this is exceeded the charge can be up to 10p per mile.

For finance companies the advantage of PCH lies in the fact that no APR value needs to be stated. PCP remains the top choice for customers looking to finance a car through a dealer, but Cottle believes that although the PCH concept hasn’t quite taken off in the UK, all it needs is some cooperation between dealers and finance companies.

“Unlike PCP, PCH also gives dealers the opportunity to see the customer again because they have to return to the dealership to give the car back. With PCP, they can go and get rid of it at any motor retailer, so it’s a great retention tool,” says Cottle.

Advice for would-be finance brokers

A dealer’s job is to sell cars or vans, but providing vehicle funding solutions for private and business clients can lead to increased sales and profit potential.

“If a dealer wants to become a fleet broker they need to start by thinking differently,” explains Christophe Desplace, director of Network, a funding provider.

“Selling finance is a vastly different animal and must be approached accordingly. Dealers need to think about what funding packages they will offer, who their clientele will be and where they will source that finance.”

According to Desplace, the business model a dealer employs needs to reflect that selling finance is more about profit than turnover.

Having a dedicated vehicle finance person in place to deal with potential customers will make all the difference.

Desplace continues: “Be prepared to offer funding on vehicles that fall outside your dealership brand. You may be a Ford or BMW dealer but at least 80% of your funding business will be for other marques. Don’t pigeonhole your customers.”

Would-be brokers can contact the British Vehicle Rental and Leasing Association for advice.

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