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Collapsing car sales – is the car industry in crisis?

Is an over-reliance on PCP car finance coming back to haunt us?

New car sales figures for the six months between April and September (Q2 and Q3) made uncomfortable reading for many people in the UK automotive industry. 132,000 fewer new cars were registered than over the same six-month period last year, and there appears to be no end in sight to the falling market.

Initially, the industry brushed off concerns. Changes to road tax rules were said to be responsible for boosting sales in Q1 and hurting car sales in Q2 as buyers raced to beat the tax rises. Seemed reasonable.

Then in mid-April, the prime minister called a general election. That’s traditionally never a good thing for car sales, as both private and fleet buyers hold off purchasing for a few weeks to see how things pan out. Then we had the debacle of the hung election and uncertainty that lasted until the end of June.

2017 UK election coverage
The election, of course, resolved everything neatly. (c) Project Syndicate

So it was easy to write-off poor overall sales figures for Q2 as the result of external events. But you would then expect things to stabilise and bounce back to normal during Q3. Except that didn’t happen. July, then August and then September were all bad months as well.

Industry organisations like the SMMT have been eager to point the blame at Brexit, lack of government support, economic uncertainty, media coverage, aliens or any other external cause they can think of. But very few people within the automotive sector seem to accept that the car industry has played a large part in bringing its current problems on itself. It’s quite simple:

The UK car industry is reliant on customers buying cars they don’t need with money they don’t have. That is simply not sustainable.

Over the course of this decade, new car sales have soared year-on-year. Certainly part of this was a recovery from the global financial crisis, but it has been more than that. Private new car sales increased by 46% between 2011 and 2016, just ahead of an overall market growth of about 39% for the same period, according to SMMT figures. So where did this growth come from?

The country’s population grew by less than 4% over the same period, so it was clearly existing drivers choosing to buy new cars, rather than any massive population increase. Average weekly earnings improved by less than 9%, although real-world incomes have barely changed at all, so it’s not like we all had extra cash to flash on a shiny new car. The inevitable answer is cheap car finance in the form of personal contract purchase (PCP) and leasing (personal contract hire, or PCH) agreements.

At the start of this decade, fewer than half of private new car buyers financed their cars through the dealership, with the majority borrowing from a bank or elsewhere, or using their own savings. Today, nearly 90% of private new car buyers are financing through dealerships, which is all because of PCP car finance.

Although the PCP has been around for a long time, its popularity has boomed over the course of this decade. The government scrappage scheme in 2009/2010 was a massive boost in getting first-time new car buyers onto the PCP treadmill, providing a handy deposit that was combined with low monthly payments to put many thousands of drivers into a new car for the first time.

As the market recovered from the global financial crisis, demand for both new and used cars was strong and PCP customers came to the end of their agreements to find that they had a handy amount of equity between their car’s value and its settlement figure, which they rolled into another PCP on another new car. And as millions of car buyers have found over the last few years, once you get onto the PCP or leasing merry-go-round, it’s quite difficult to get off again.

PCP car finance in action
PCP car finance in action

Short-term desperation has caused longer-term problems

With PCP finance becoming more popular and customers swayed by low monthly payments, car manufacturers and finance companies began looking for ways to gain an edge and keep sales flowing. Different methods have been used to keep the advertised monthly payments as low as possible for both PCP and lease agreements, putting short-term results ahead of long-term sustainability.

Finance companies started pushing guaranteed future values (GFV/GMFV) up, even though used car values were falling due to the increased number of three-year-old cars coming back onto the market. The better the GFV, the lower the monthly payment. Of course, that meant less chance of a customer having equity at the end of the agreement, but that was a problem for tomorrow, not today.

Advertised offers have been based on ever-decreasing annual mileages. Instead of basing calculations on 10,000 miles per year, which is a reasonable average for most drivers, most deals are now advertised on the basis of 6,000 miles per year. Lower mileages mean better GFVs, which keep monthly payments down, etc. This was often not conveyed clearly to customers and many buyers have found themselves with unexpected excess mileage penalties.

The other tactic has been to stretch the contract lengths from the previous default of 36 months (three years) out to 42 months or 48 months (four years). A longer term means lower monthly payments on either a PCP or a lease. Again, it’s great for doing business today but creates problems tomorrow.

The net result of these tactics is that customers are coming back at the end of their PCP agreements (or before, when dealers have been chasing them with phantom early upgrade offers) to find that they don’t have their expected or promised equity, so they don’t have a ready-made deposit for a new car. With less deposit, they can’t afford the car they want, so they take a four-year term instead of a three-year term. That means that they are not going to be buying another car for at least a year longer than last time.

If every private PCP customer switched from a three-year PCP to a four-year PCP, some quick back-of-the-envelope maths suggests that it would cost the industry about 300,000 new car sales per year. If contract hire (both private and corporate) customers did the same thing, it would be even more disastrous. It would have a much greater impact than the various external excuses being thrown around.

Car finance heading for collapse?
The predicted impact on the car industry of everybody taking an extra year on their finance agreements.

Customers are still dependent on low monthly payments

Plenty of industry mouthpieces have complained that the general media is scaring the public away from buying cars with dire warnings about the perils of car finance. But those arguments don’t really stack up.

Media coverage and other warnings about PCP finance don’t appear to be putting people off. Monthly reports from the Finance & Leasing Association (FLA) show that a record 86% of private new car buyers are financing at dealers in 2017. The number of deals being done has decreased in line with the decrease in new car sales, but the amount of money being borrowed is still going up as buyers take on even higher levels of PCP debt.

It’s not like we’re seeing more buyers borrowing from elsewhere or paying cash. They’re still taking dealer finance – there’s just fewer of them about, and they are being talked into taking longer contracts so there will continue to be fewer coming back again each month for the next few years.

There have been waves of financial incentives and cheap credit thrown at car buyers to keep them coming into showrooms, but it would seem that the new car market has reached saturation point. There simply aren’t enough customers for all these vehicles. And with used car values continuing to fall, new cars are starting to look very expensive by comparison.

Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.


  1. Is it now getting to the point where buying a hybrid or electric car is the only sensible option? It certainly seems that diesels will be harder to sell on in the coming years and there will be more and more incentives for people to embrace greener technology. Can’t help feeling that the public have been massively let down by the dishonesty from manufacturers over diesel emissions. Thousands will be left with cars that, they were led to believe, were better for the environment before having the rug pulled from under them.

    • Hi Pete. It still depends on how you plan to use your car – for many people, a diesel is still the most sensible option. However, based on how most people use their cars, a diesel has never been the best option – people bought them thinking they were saving money on fuel costs but they probably haven’t saved that much overall.

      Customers will feel let down, and it’s a combination of manufacturer shadiness (typified by Volkswagen), government policy (misguided or otherwise) that encouraged people to buy diesels, and people’s own laziness in not analysing their own needs to make an informed decision that has led to far more diesels on our roads than there ever should have been.

      Yes, there will almost certainly be a combination of carrot and stick to get people out of diesel (and petrol) cars, and into electric vehicles. Whether scrapping perfectly-serviceable cars in favour of new hybrids or electric cars is actually environmentally a good idea another can of worms altogether…

  2. I’m getting worried and confused with PCP contracts now – the constant talk of brexit, falling car sales, interst rate rises, worry about rising consumer debt etc etc.

    It all sounds like every major organisation is desperately trying to warn the public that the motor industry is luring them into a car version of the 2008 housing crisis – but nobody is actually doing anything substantial.

    Should we (joe public) be looking at ourselves in the mirror and saying “stop switching cars every few years/stop spending so much on monthly payments for something you will never actually own/you don’t need the latest shiny shiny”? Should we be staying away from finance and only buy what we can afford?

    Alternatively, is this just another aspect of today’s consumerist society where everything is disposable and nothing is intended to be kept for any extended period of time (TVs, furniture, phones, computers even houses are all examples of this), there only needs to be an attitude change that people need to accept that the automobile industry is now run on consistent short term ownership. What is needed is education on how to manage one’s finances.

    Sorry for the rant but ultimately I now feel that being swayed by a finance deal might just be me being a sheep to the industry rather than taking a sensible view of cars and how they should be owned and operated? (hope this makes sense!)

    • The reality is that the majority of new cars are sold to people who don’t need them, and paid for with money they don’t have. On an individual level, if you want a new (or newer car) and you are happy to finance it via whatever means you like, then that’s absolutely fine. If you choose not to borrow money to buy a car, that’s fine too. But the industry is reliant on millions of people going into considerable debt to buy cars every few years. If we stop doing that, there will be serious repercussions.

  3. I have a PCP and had a PCP – Traded in my BMW 320 what was on HP and low payments and stupid me called into BMW to look!!! Next thing I had bought a 1-year-old BMW Z4 M Sport – fantastic car – later on after a year or so, work changed contract so money would be less, so I changed for a MINI Coupe again a 64 plate but they had the difference to pay put on Mini PCP – Still ok with finance, After having Mini which I hated for 6 mths work money turned out to be the same and I wanted a Z4 again, I asked about HP as this is never pushed only PCP – But with the difference in money it was cheaper with PCP. I pad £2,000 deposit and am now 11 mths into contract on a 2014 Z4 Auto fully loaded BMW with a 15,000-mile allowance – but car worth 17k approx. and I owe around 27k – Work, as I work for a German company, are now lowering our hours as work has slowed, I may be earning near the same as less tax to pay but I thought maybe I should go back to a 320 or a 116 petrol to get payments down and a car I car park without wondering if safe. I do not want to do PCP – I want to keep the car. At the moment I pay £556 per month my insurance has gone up to £650 per year and tax and warranty due in Jan. Do you think I would have money of some sort in Z4 as they did say after a year a deal could be made. My Z4 which I adore but just goes out now and then and to and from work had 10,000 miles on when bought now has around 21,000. I bought the car from Williams of Bolton) Thanks

    • Hi Rupert. If you have £10,000 of negative equity, it is going to take a long time for you to be in a position where you can exit the agreement without having to shell out a lot of money.

  4. Hi Stuart I too went for the pcp option on a diesel Hyundai Tucson (bad mistake) and am now halfway through the agreement and am ready to change and i am looking at hybrid cars but the government are now hinting at punishing diesels in the budget and hybrids are very expensive to buy, my view now is to wait for the budget see how it will affect me and whether I keep the diesel and run it into the ground because there is no incentive to go hybrid because of tax and ownership.

    • If you’re only halfway through your PCP agreement, it will probably be expensive to change now as you’re likely to have a bit of negative equity that needs to be cleared before you can move onto paying for your next car.

      It will be interesting to see how the market develops for diesels – it’s unlikely to get easier. There will be more and more incentives for hybrids and fully-electric cars in coming years, as there needs to be a massive push to hit the government’s target for 2040 (let alone any other rules that may kick in from local governments beforehand).

  5. The new car industry is reliant on ‘frequency of purchase’, as the dynamics of the new car industry move from company cars to private they become more susceptible to buyers extending the period between car buying or stepping out if the process into second hand.

    With nearly a million company cars it is amazing how the car industry let’s the government target their steady revenue stream with stealth taxes.

    The short term benefit of buyers opting out of company car schemes will be short lived in difficult times as private buyers will happily move to the used market or extend the time between buying new.

What are your thoughts? Let us know below.

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