British consumers losing interest in buying new cars on finance

The march of the brand new car once seemed unstoppable. Cheap finance and personal contract plans (PCPs) fuelled a boom in new cars, accounting for more than 80 per cent of all new car registrations. A fall at the start of 2017 was blamed on a collapse in consumer confidence in diesel vehicles and last year remains one of the highest on record for new car registrations.

However, the latest figures reveal that the number of new cars registered in February fell by 2.8 per cent compared with the same month last year, making it the 11th month in a row to show a decline. And once again it’s being blamed on falling demand for diesel vehicles; diesel cars accounted for just 35 per cent of the new cars registered last month, compared with more than 44 per cent in February 2017.

But what if it’s not just “dirty diesel” news stories and the new emissions standard that launches next month? That standard will mean that diesel cars that don’t reach a certain emissions benchmark will incur more tax than before. Experts suggest a slump in confidence is helping the nation’s big ticket spenders get over their addiction to credit.

Falling out of love

The previous surge in new car registrations had been partly fuelled by changes to the way we buy vehicles. Buying a brand new car with a relatively small deposit and monthly fee can be more immediately affordable than buying an older car upfront.

Research from AutoTrader showed that 37 per cent of car buyers claim to have bought on finance because it enabled them to spread out their payment monthly, 36 per cent to get a better deal and, revealingly, 36 per cent because they couldn’t afford to purchase a car otherwise.

Cheaper to access, smarter to drive, it’s easy to see why new cars on credit have been so attractive. But alarm bells have sounded in some areas and last summer the Financial Conduct Authority announced it would be closely scrutinising the car finance market to better understand its lending practices.

Danielle Clements, consumer affairs solicitor at Gorvins Solicitors, says that concerns over whether credit is being sold appropriately is one reason would-be buyers are “falling out of love with car finance”.

“In the light of this pending investigation, consumers will certainly have some trepidation about entering into new car finance deals and instead will often consider a range of finance options rather than the once popular use of PCP and car finance.

“What’s more, dealers also need to conduct their own reviews to ensure that their sales processes are robust, that staff are properly trained and not incentivised to promote PCPs over other alternatives and that as businesses they are focused on achieving good consumer outcomes.”

There is certainly some evidence that buyers are not shopping around to find the most suitable deal. A survey from the RAC shows that a quarter of drivers didn’t understand the various finance options available to them when they came to an agreement with a dealer or company.

And 72 per cent of buyers said they had taken the first finance product offered by a single car dealer rather than comparing offers. Of particular concern was the 45 per cent of drivers who said they had been forced to cut back elsewhere to meet their car repayments.

Yet Auto Trader’s Nathan Coe says there’s little evidence of mis-selling or of a bubble within car finance. He highlighted that 82 per cent of drivers who had recently bought a car on finance had said the purchase was within or below their initial budget.

“The growing cynical view in the City that car finance is a credit bubble waiting to burst is simply not warranted. The negative outlook on car finance has largely been based on the expectation that used car prices will crash as a result of an influx of cars entering the market, driven by the growth of new car PCPs.

“However, there has been no evidence of this in Auto Trader’s price observations despite the new car market growing dramatically since 2012. The average price of a second-hand car on a like-for-like basis increased by 4 per cent between 2016 and 2017.”

Key industry figures have commented that car finance is conservatively modelled and asset-backed, making it lower risk and unlikely to cause a shock to the financial system.

Levelling out

Not everyone believes that demand is heading towards a significant fall; some argue that it is simply levelling out.

Justin Benson, KPMG’s UK head of automotive, says: “Consumers aren’t necessarily turning away from car finance. There is, however, evidence to suggest that the new car market is pretty saturated, ie most cars in the last few years have been bought using PCP plans. So many are using the vehicles they already have and we are seeing a drop in demand – although Brexit is also in the back of people’s minds.”

And the problems being stored up could affect the retailers far more than the consumers. KPMG recently published a survey of automotive executives that showed 61 per cent believe issues could arise if significant numbers of vehicles are handed back with a lower-than-anticipated value.

Benson continues: “The key concern is the effect that recent events, like ‘dieselgate’ and clean air targets, are having; putting significant downward pressure on residual values. Most PCP consumers can walk away if there’s no equity in the car for the next purchase, but if the finance companies can only sell vehicles at levels below diesel residual values, then there is a risk to their profitability in the next few years.”

Of course, the health of the British car industry could play a key role in the country’s wider economic health in the future, particularly as industry grapples with any Brexit fallout. Terry Hogan, chief executive of automotive tech firm Regit, says the Government needs to act to restore consumer confidence that they are buying the right new car.

“The biggest threat to the market is the current negative sentiment towards diesel cars and the lack of infrastructure for mass use of hybrid and EV cars. Consumers buying new cars are confused and don’t know when to go electric, and this will in all likelihood mean the downward spiral of new car sales will continue for the next two or three years.

“It’s therefore important that messaging, and more importantly action, coming from whichever government is in power will be much stronger than it is at the minute to reassure motorists and ensure sales remain high for the sake of manufacturing jobs in the industry.”

The recent surge in car finance represents a fundamental shift in the car-buying industry. Whether that’s a problem for consumers, the automotive sector or the economy at large remains to be seen.