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Has the PCP car finance bubble burst?

Latest car finance data shows that the popularity of traditional new car finance is decreasing, continuing a pattern that has been developing over the last two years

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Car finance data from the first six month of this year shows that the popularity of traditional new car finance is decreasing, continuing a pattern that has been developing over the last two years.

According to data published this month by the Finance and Leasing Association (FLA), the number of private car buyers financing a new car in the first six months of this year has gone down by 7%. That’s despite the number of private new car registrations going up by 2%, according to industry data published by the Society of Motor Manufacturers and Traders (SMMT).

So what does this mean, and what’s causing it?

How most consumers fund their new cars

The vast majority of private new car buyers use a car finance product called a PCP (personal contract purchase), although other products like HP (hire purchase) are still used by a small number of customers. PCP was originally a finance product very much aimed at new car customers, but it is increasingly used for used car finance as well.

For new car sales, car finance is almost exclusively provided by the car manufacturer’s chosen car finance provider – either their own bank (like Volkswagen Financial Services), or a partner firm (banks like Santander work with a number of car brands to provide new car financial services).

This provision of funding, usually arranged by the dealership on behalf of the finance provider, grew massively in popularity over the last decade. In 2009, less than half of all private new car buyers used the manufacturers’ financing. By 2018, it was more than 90%, peaking in 2020 at 93%.

In other words, nearly every new car buyer for several years has been arranging their car finance at the dealership. But over the last two years, this has started to change.

From about the summer of 2021 onwards, the number of new car buyers financing their cars in this manner started falling and has continued to do so at an ever-increasing rate. The full-year numbers for 2021 showed only a small drop, to just under 92%, but this fell to 84% in 2022. And based on the data for the first six months of this year, it has fallen to less than 79%.

To put it another way: about 33,000 fewer customers have bought a new car using traditional car finance in the first six months of this year compared to 2021, despite private new car sales going up by about 25,000 cars over the same period.

Private new car sales vs. car finance
YearPrivate new car salesNumber of car finance dealsMarket penetration
20181,052,202959,72991%
20191,018,258933,41792%
2020747,507696,73793%
2021802,504737,05392%
2022818,192684,32784%
2023*435,325342,21679%

* 2023 data for Jan-Jun only
New car sales data: SMMT
Car finance data: FLA

What’s causing this shift?

Obviously, the car industry has endured enormous upheavals over the last three years thanks to Covid-19 and ongoing production problems that have followed. Plus there’s been Russia’s war against Ukraine and the impact that has had on the global economy. And, of course, the car industry itself is in the middle of the largest upheaval in its history with fossil-fuel cars being phased out in favour of electric cars.

These factors have played havoc with new car supply and pricing, so that’s impacted on customer choice. But there is also something of a revolution going on in terms of automotive retail, with new types of funding opening up for customers.

In recent years, we have seen growth in leasing (personal contract hire) for private customers, rather than it being the exclusive domain of fleet buyers. There are various reasons for that, but the key issue here is that leasing numbers don’t count towards the FLA’s car finance data as no money is being borrowed – leasing is simply a rental.

Likewise, we’re now seeing significant interest and growth in two other types of car funding; salary sacrifice and car subscriptions. These are also forms of leasing/rental, so again they don’t show up in the FLA data.

With so many factors involved for both supply and demand, it’s difficult to pin down how much each of these factors are contributing to the overall numbers. And it means that tracking how much money is being spent on new car funding is getting more difficult.

Why are customers shifting away from PCP car finance?

It’s good news for consumers that there are now multiple types of funding widely available for new cars. Each different type of funding has its own pros and cons, so customers can make sure that they have the right type of finance for their needs rather than being obliged to take a PCP.

Given that we’ve been working to grow awareness and understanding of car finance pretty relentlessly over the last decade at The Car Expert, I’d like to think that more customers are paying attention and thinking more carefully about the financial choices, at least partly based on the sort of independent guidance found here (and increasingly elsewhere as various other motoring sites reference our work).

In reality, it’s more likely to be the result of more finance options springing up to meet customer demand for lower monthly payments and/or more flexibility. On top of that, the EV revolution is again playing a key part.

Salary sacrifice is particularly attractive for electric vehicles, thanks to substantial tax advantages. If you’re eligible to take a sal-sac package, you could save hundreds of pounds a month compared to PCP finance or PCH leasing. There are loads of dedicated salary sacrifice providers popping up to cater for this demand, and this trend is likely to continue while the tax advantages are so compelling.

Car subscriptions are also becoming more popular thanks to their flexibility and all-inclusive nature. Although the monthly payments are higher, they usually cover service, wear-and-tear items like tyres, road tax and often comprehensive insurance as well. Plus they are also available for terms as short as a month or two, meaning you can try an electric car for a few weeks to decide whether it’s right for you before committing to a four-year lease or PCP.

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Firstly, the PCP remains the dominant car finance product for private new car buyers, and is likely to remain so for the time being. Of the 79% of new car buyers who have arranged their finance through car dealerships this year, the vast majority are using a PCP instead of other forms of finance. No other form of funding comes close.

But as fossil-fuel cars are phased out and EVs become the norm, the PCP as we know it looks less and less attractive. This, however, is likely to depend on the government’s approach to tax benefits for electric cars.

The government has promised that EVs will enjoy their current level of tax advantage (called Benefit in Kind, which applies to company cars and salary sacrifice) will run until at least 2028. But, of course, this government has been known to change its mind or U-turn on monetary policy with regularity, so this could change completely if it suits a political purpose…

The other large monetary trend is a shift away from ownership towards usership. Customers have shown to be quite happy to trade away ownership of their assets in favour of lower payments. We see this with various subscription packages for phones, TV, music, gym and lifestyle memberships, computer equipment and many more areas, and cars will be no different.

Most customers never pay off their PCP debts in full anyway, preferring to hand the car back at the end of their agreement and start again with another car. So they’re effectively treating their car finance like a lease anyway, which means a jump from a PCP to actually leasing or renting a car is a pretty natural step.

What does the future hold for PCP finance?

We’re again starting to see change in the world of PCP finance. Only this week, Vauxhall announced that it will now offer five-year PCP deals on its new electric vehicles. This is up from the maximum of four years offered by almost every car finance lender until now, and Vauxhall isn’t offering longer terms on its petrol and diesel models at this time.

A five-year PCP will mean lower monthly payments for customers, helping them to afford EVs that are still significantly dearer than equivalent petrol cars. But this comes with risks.

Taking an extra year on your car finance agreement mean paying a lot more interest (the Vauxhall offer is currently set at 10% APR, so you’re paying thousands of pounds in interest over five years). And you’re borrowing more money but paying less off each month, meaning that you’re carrying a lot more debt for a much longer period.

If your financial situation deteriorates over the next five years, you could be in a much deeper hole than with a three- or four-year loan. But longer-term finance agreements look inevitable as the cost of new cars, particuarly electric cars, continues to increase and customers look for the lowest possible monthly payments.

Assuming that Vauxhall’s five-year PCP offer proves popular, it’s almost guaranteed that the rest of the Stellantis family (which includes Peugeot, Citroën, DS Automobiles, Fiat, Jeep, Alfa Romeo, Abarth and Maserati) will follow. And that’s likely to lead to other brands doing the same to remain competitive. Then the leasing companies are likely to follow, and suddenly a five-year finance deal will become normal.

We’ve already seen this happen in recent years, when three-year PCP and PCH offers gradually became four-year offers in the second half of the last decade. And although their finance products work differently, other countries are trending towards longer terms as well as cars get ever-more expensive.

In the USA, for example, seven-year finance deals are pretty much normal now for new cars, and there are many eight-year finance deals being offered as well (America doesn’t really do PCPs, so their finance agreements are more comparable to HPs).

So how should customers finance their next new car?

As mentioned earlier, we very much believe that a wide choice of funding products is a good thing for customers. What’s most important is that you look carefully at your options, rather than taking the product that a salesperson or advertisement is trying to sell you – it will almost certainly be the best option for them, but not necessarily for you.

We’re big fans of car subscriptions for customers who are interested in testing the waters on an electric car before locking themselves into a long-term contract. But if you know what sort of car you want and you’re happy to keep it for a few years or more, a subscription probably isn’t for you.

Salary sacrifice is a very attractive option for new electric cars, but you have to be eligible and your company has to offer a sal-sac programme. That means that many customers can’t access this form of funding.

Leasing is continuing to grow in popularity, especially as it often works out cheaper than an equivalent PCP for the same vehicle. However, the terms and conditions are very strict, so cancelling your agreement mid-term is likely to be very expensive.

The PCP is likely to remain popular, especially as manufacturers and dealers push people into longer-term deals to help keep payments down. Make sure you’re very comfortable with the monthly payment levels, as you’ll be locked into them for years to come.

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Stuart Masson
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.