Finance Helps Economic Recovery
At last! The UK economy is now officially back to where it was six years ago. We might have lost over half a decade’s worth of growth and increased prosperity but at least we can now look forward to the chance of getting a few more pounds in our pockets at the end of each month.
This is old news in the UK car industry, which has been bucking the trend for a while now. New car sales have been seeing huge jumps over the last few months and the latest figures from the Society of Motor Manufacturers and Traders are no exception. June saw a 6% rise in sales to 194,582, up from 182,104 in 2013. The year-to-date figures for 2014 have seen a 10% increase in the same period in 2013, meaning 105,000 extra sales in the first 6 months of the year.
So why has the car industry started recovering so quickly? After all, we’re not all entitled to a new company car every couple of years. A lot of that growth has to have come from people spending their own hard-earned money on a new car.
It never ceases to amaze me how many new cars are on the road with a ticket price of £30,000 or more. Seeing the number of expensive BMWs, Audis and Mercedes travelling around on the latest plates, you could be convinced that the recession was little more than a figment of the newspapers’ collective imagination. However, there is a simple answer to this apparent contradiction. Finance.
The days of ‘Cash is King’ are long gone. If you turn up to buy a car with a suitcase full of used £50s you’re more likely to be talked into a tempting finance package than be offered a discount. Dealers have to bolster the low margins on new cars in any way they can and a two or three year finance deal suits them nicely, while at the same time allowing the paying customer to drive away without spending all of their savings.
It’s Purchase Contract Plans in particular that have really caught on. They’ve seen an 18% leap in sales (in the year up to April) and it’s easy to see why they’re so attractive. You get to drive a new car but instead of taking out finance on the full price you’re only covering the cost of the depreciation. The downside is that you don’t fully own the car, but at the end of the deal you’re free to walk away and choose another.
It’s a great way of getting into a new car for less money, particularly if it’s a model that has strong second hand values. This is why the German brands always seem to be so affordable on PCP, because their desirability gives them great residual values and that means you’re covering less depreciation.
Finance isn’t all about new cars though. It’s just as valid in the used sector, but if you’ve got a bad credit history it can often be difficult to get your foot into the door of the dealer. This is where a payment box comes in handy, a device that’s making car financing a realistic option for buyers with a poor credit rating.
Clearway were one of the first companies to offer payment boxes with their finance deals and the system is proving to be popular with car buyers. The thought of fitting a box like this to a car may seem sinister to some, but if you can’t get finance by any other means this is a chance to buy a car that would otherwise have been out of your reach, while the financing company is given extra security on the loan. The payment box only makes its presence felt if you fail to keep up with the payments, at which point the finance company can remotely disable the car (not while it’s being driven, only when it’s been switched off for a length of time). As long as the payments are kept up to date it’s a win-win scenario for both sides of the agreement.
Now that the economy has picked itself up and brushed off the dust of the recession, are we likely to see a swing back in favour of cash? It seems unlikely. Dealers are understandably keen on finance packages, there are many brokers offering enticing PCP deals, and payment boxes put loans within reach of people who otherwise wouldn’t have had the option. For many of us paying off the car finance has become just another part of the monthly household budget, like the phone contract and electricity bill. Cash may once have been King, but finance is sitting on the throne now.