Britons Will Struggle to Stay on the Posh Car Treadmill


Visitors to Britain are often struck by the number of people who drive fancy cars. If an Englishman’s home is his castle, then his ride must be a high-end BMW or Audi. As the cost of credit rises, maintaining that lifestyle is becoming increasingly difficult, threatening to hurt automakers’ profits.

Although UK real incomes have declined since 2008, ultra-low interest rates have softened the blow by helping Britons to purchase a shiny new premium motor every few years, one they otherwise couldn’t afford. Now rising borrowing costs are putting this happy arrangement in jeopardy by raising the monthly cost of the Personal Contract Purchase (PCP) plans that finance the bulk of UK private car purchases.

Premium automakers may have to cut some slack for buyers as affordable brands like Kia, Hyundai, MG and Dacia gain market share. But the carmakers’ captive finance units are unlikely to face calamity, thanks to another notable feature of this market: used car prices, which help determine the cost of PCP plans and the supplier’s financial exposure when customers return the vehicle, are still extraordinarily high. For now

It’s easy to whine about people taking advantage to tool up big SUVs or keep up with the Joneses, but PCPs were a good deal for consumers while the music was still playing, and I don’t blame them for taking advantage.

In short, a PCP deal works like this: after paying a hefty upfront payment, the customer pays a few hundred pounds each month for the duration of the three- or four-year contract, subject to a mileage cap.

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At the end of the contract, they can return the car and pay nothing more, just like a lease. Alternatively, they can choose to pay off the balance (known as a lump sum payment) and purchase the car outright, or trade in the vehicle for a new one and start a new PCP agreement. Many drivers opt for the latter, which can make PCPs feel like a never-ending financial treadmill. Of the 84% of consumer car sales financed in the 12 months to November 2022 by Finance & Leasing Association members, 79% were PCP deals.

It is true that the Bank of England hiking rates to 3.5% from 0.25% last year will not affect most current car loans as PCP rates are fixed. However, 0% APRs are becoming increasingly rare. It is a common misconception that PCP customers “only finance depreciation”, when in fact the APR quoted includes the lump sum payment. Hence it matters if he now has to pay 8% interest instead of 4%. A study of five popular models in November found monthly PCP costs are already 23% more expensive compared to 2019 due to a combination of higher vehicle prices and borrowing costs.

Another survey in September found that the average monthly cost of four-year PCP deals rose to £538 ($662) from £479 in the past year. Autocar magazine lamented that “finance deals will never be as good as they were in the last decade… We never realized how much fun we had.” a lot

Facing pressure on the cost of living and having to devote more of their income to servicing their mortgages, Britons may have to look down when choosing a new vehicle. “The cost of credit has risen and consumers are cutting clothes to fit their new situation, which may mean choosing a smaller car or a lower-spec model,” says Adrian Dally, director of motor finance at the FLA.

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This is potentially bad news for German carmakers who have until now relied on the UK market to shift a lot of expensive metal; PCP offers motivate customers to buy an expensive new car more often, and often stick with the same brand. In fact, a cynic might wonder if PCP really stands for Posh Car Plan. BMW AG and Audi are among the best-selling brands in the UK and around 30% of UK car sales are premium vehicles, compared to an average of 22% in Germany, France, Spain and Italy, Morgan Stanley notes. The bank lowered its 2023 forecast for UK car sales in October to reflect potential financial pressures from the PCP.

Manufacturers may have to cut new car prices from current exorbitant levels or forego some sales altogether.

It’s not all bad news. While UK used car prices fell by around 3% last year, this was after a 30% rise in 2021, according to automotive data provider CAP HPI. Current PCP customers therefore often find that their vehicle is worth much more than the finance company predicted at the start of the contract, and can roll this equity into a new PCP deal or make a profit by buying the car and selling it.

Used electric vehicle values ​​have come under pressure lately due to big price cuts by Tesla Inc, but overall used car prices are unlikely to quickly fall back to pre-pandemic levels. New car production has been severely curtailed for three years due to parts shortages and manufacturers prioritizing retail customers, so rental and fleet users have fewer vehicles to return.

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“People say what goes up must come down, but that’s really not the case here,” says Derren Martin, director of ratings at CAP HPI. “We don’t think used car values ​​will collapse.”

So the carmakers’ financial units seem pretty well insulated. Its windfall profits from the sale of leased vehicles will normalize, of course, and BMW made a provision of three-digit million euros in November to reflect deteriorating customer finances. However, compared to the US, there are proportionately fewer subprime car borrowers in the UK. Customers cannot terminate a PCP until near the end of the contract and loan delinquencies remain very low, which bodes well for securitized PCP loans.

PCP carousel creaks but still doesn’t break down.

More from Bloomberg Opinion:

The mortgage market is a bright spot in the UK’s cost of living crisis – Marcus Ashworth

Tesla’s Skid leaves the old car with a new upset: Liam Denning

• Britishvolt is a monument to the empty hype of global Britain – Matthew Brooker

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

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