Over the last few years, new car sales in the UK have been growing steadily. New car sales rose by 11 per cent in 2013, with almost 2.3 million new cars being registered.
There have been lots of reasons for this including a growing desire for more fuel efficient cars, and the arrival of some terrific new models. However, The Economist, the leading business journal, has highlighted the impact of cheap car leasing and contract hire plans on the success of the UK’s car market. Keep reading to find out more…
Personal contract plans becoming more popular with car buyers
In 2013, around half of all new cars were sold to private individuals with the rest being accounted for through fleet sales to businesses. And, it is an increase in private customers that has driven the increase in new car sales in the UK.
While The Economist says that growing consumer confidence is one explanation for the boom in car sales, it does not tell the whole story. For example, German new car sales actually fell in 2013, despite their growing economy.
The journal says that ‘as important as the perennial desire to get behind the wheel of a new car is the way sales are financed’. According to Paul Harrison of the Finance Leasing Association, almost two thirds (64 per cent) of new cars are now bought using a personal contract plan (PCP), up from 53 per cent in 2009.
Personal contract plans were introduced over 10 years ago. You put down a small deposit and then you commit to a plan for a period of, typically, between two and four years. At the end of your car leasing agreement you have the choice of handing the car back to the contract hire company or making a final ‘balloon’ payment to own the car outright. The ‘balloon’ payment (or ‘minimum guaranteed future value’) is agreed when you sign the initial paperwork.
The main difference between contract hire and hire purchase is that, under hire purchase, your repayments incorporate the total value of the car. At the end of a hire purchase agreement you’ve paid off the finance and you own the car outright. Paying off a much smaller sum than with hire purchase on the same car makes monthly repayments on a contract hire plan a lot cheaper.
Cheap car leasing means you can drive a new car every few years
The Economist believes that cheap car leasing and contract hire deals are a major factor in the new car sales boom. Another reason that sales are high comes from Jonathan Visscher of the Society of Motor Manufacturers and Traders (SMMT) who says that dealers frequently report that customers are putting down deposits using compensation payments for mis-sold payment-protection insurance.
One of the main advantages of a personal contract hire is that you get to drive a new car every few years. At the end of your agreement you can hand the car back to the leasing company and agree a brand new plan.
The Economist reports that the increase in car leasing as a method of driving a new car has reduced the average period of car ownership from around four years to nearer three years. Of course this also benefits the new car manufacturers, who are selling new cars on a shorter cycle than before.