Is Car Finance Driving Business Away?


If we were to ask you which name you most associate with car dealerships, and you were of a certain age (and remember Euston Films’ heyday!), it’s a fair bet you’d reply, “Arthur Daley.” Thankfully, new and used dealerships have come a long way since the 1980s with stylish showrooms, attentive staff, free warranties or services, and even on-site coffee pod machines while you wait.

However, when it comes to the financing, there’s still a lot of room for improvement.

PCPs (Personal Contract Purchases) are the preferred financing model for dealers of both new and used car sales.

Broadly, it works like this:

1.    A consumer makes a low deposit and commits to a monthly rental payment.

2.    At the end of the contracted term the consumer can do one of the following:

a.    Return the car and walk away with no further payments.

b.    Use the equity balance (between car’s value and monies owing) to part-fund the next car purchase with a new contracted term.

c.     Purchase the car outright by a final payment (with any associated fees).

It is a hugely competitive – and lucrative – market. In the first six months of 2016 dealerships showed around a 15% growth in car finance specifically for the consumer market, which equates to a rise of 11% by volume.

Much like the practice of offering extended warranties with electronic goods at the till, there are also opportunities for dealerships to up-sell a bewildering range of add-on financial products.

These can include policies that cover replacement tyres, replacing keys and Guaranteed Asset Protection (GAP) insurance. If your car is stolen or written-off as a result of an accident GAP covers the gap (see what they did there…) between your car insurer’s payment and your car’s original valuation when you took out the PCP.

Oh, and did we mention there is more than one type of GAP?

Why does it matter so much right now?

At the end of 2014 The Financial Conduct Authority, which regulates businesses that provide consumer credit, signalled its intentions to reform the GAP insurance market.  As its own website reported: We found that consumers were often buying without having previously thought about the product or shopping around for alternatives and were not always getting the best deal.

From an industry perspective, as Arthur Daley might have put it, this had previously been a nice little earner. However, now the FCA has car dealerships in its headlamps and wants to make good on its promises of stronger regulation and consumer protection. This will encompass data protection, consistency in the application of the four-day-rule, and ensuring consumers understand exactly who their financing relationship is with. This new era of governance might encourage dealers to find other ways to maximise their profits, so let us hope we don’t see an increase in crippling APR rates and other sharp practices from the past.

The solution for dealerships must be a greater focus on customer experience. Last month Auto Express published the results of a customer survey, which found no more than a 10% variance between dealership satisfaction ratings. With such a narrow playing field dealers need to nurture their customer relationships, as well as their reputations.

Disruptive technologies are delivering new ways of doing business, be it virtual showrooms or interactive displays that make the traditional car dealership seem…well…pedestrian. Maybe that’s why manufacturers such as Mahindra and Tesla have dispensed with dealerships altogether, while some have retained a showroom but relocated it in a prime shopping location.

The customer / dealer relationship is changing. Consumers have all the information at their fingertips to make key decisions before they leave home. Service providers of all kinds would be wise to grasp that fact and make it central to their business strategy. Do it well and, as Arthur Daley would say, the world’s your lobster!


Image borrowed from MoneySupermaket.Com and their consumer GAP insurance article.