Is the UK becoming a nation of car renters
If you want to drive a new car, the chances are that you’ll be using a car lease or dealer finance to do so. Figures from the Finance and Leasing Association show that in 2012 the number of people buying new cars via dealership finance packages rose by 26 per cent from 2011 meaning that more than 70 per cent of new cars were bought this way.
The Daily Mail reports that ‘increasingly drivers are opting to use Personal Contract Plans to get a new car every three years or so, while putting down relatively small deposits and paying just a few hundred pounds a month for them - with a growing trend of never actually owning the car outright.’
So, is the UK becoming a nation of car ‘renters’? We investigate.
Personal contract deals are most popular with car leasing customers
According to the Finance and Leasing Association, the most popular product for financing a car is a Personal Contract Purchase (PCP) plan. Personal contract plans account for 61 per cent of all new finance agreements with hire purchase (HP) accounting for 26 per cent of the market and leasing eight per cent.
And, the popularity of personal contract plans has grown sharply in recent years. According to data, back in 2006, only 38 per cent of car financing deals were via this method, opposed to 56 per cent taking out an HP deal.
With a personal contract deal, you typically pay a small deposit – around three months payments – and then a fixed monthly payment for the term of your agreement. There is then an option to pay the final balance (sometimes called a ‘balloon payment’) at the end of the agreement.
You make monthly payments to the finance company and your payments are based on the difference between the purchase price of the car and the ‘balloon payment’, plus an interest charge – unless you get a 0 per cent deal.
And, with a personal contract deal, you have the choice of whether you want to make the final payment.
Increasingly, drivers are looking to reduce their monthly repayments rather than pay more and own the car at the end of the finance deal.
Monthly repayments on personal contract deals tend to be lower than on other types of finance because you don’t necessarily own the car at the end of the loan. Under a contract hire deal you can pay off the deferred amount in full and keep the car, hand the car back to the dealer and walk away or trade the car in and repeat the process.
So, which choice do personal contract customers take at the end of their leasing agreement? Keep reading to find out.
Use the equity in your car to fund another car leasing deal
According to rough estimates from the FLA, only around one in five customers choose to make the balloon payment at the end of their contract and buy the car. A small minority choose to hand the car back at the end of the term, but the most popular choice is to use the equity in the car to act as a deposit for a new personal contract deal.
If the end payment is for £6,000, but the car is actually worth £7,000 you will have £1,000 in equity. You can then use this equity as the deposit towards a new car.
The Daily Mail concludes that ‘this has resulted in a growing number of people essentially ‘renting’ a car, and repeating the process over and again in order to upgrade their motor, almost like a mobile phone contract.’
Author Bio: Vincent Hill is Marketing Executive at First Vehicle Leasing . First Vehicle Leasing provides best mazda car leasing solutions to all over United Kingdom