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Britain's Booming New Car Market Could Damage Economy

By raccars Published

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It might sound counter-intuitive, but auto industry experts in the UK are concerned about the number of new cars being bought and the potential effects on the used car market. The problem comes from the number of customers buying through PCPs, or personal contract purchases, which rely upon an estimated used value of the car to determine payment conditions.

In the last decade, the number of customers buying a new car on a PCP or similar finance arrangement has gone up from 45% to 75%, and experts suggest this could end up depressing used car values and oversupplying the second-hand market.

A PCP sees customers pay a deposit and then pay a fixed monthly rate for a set term - usually about three years - at the end of which they can surrender the vehicle and start a new PCP for a new car. They can take full ownership of the car by paying a Guaranteed Minimum Future Value, which is basically the price it is estimated the car would be worth at that point, agreed when the contract commences. However, GMFVs are affected by fluctuations in the used car market, and if over the term of the contract average used values fall, customers are better off returning the vehicle rather than keeping it. Industry analysts are concerned that this will see PCP vehicles flooding the market at the end of the contract term.

PCPs have become such a popular way to buy a car that if future value projections don't reflect the way the market actually behaves, the effects could be devastating. Financial and automotive professionals are beginning to understand how fragile a process it is to estimate a used car value four years in advance, and there are fears that the Financial Conduct Authority could be dragged into things if it turns out those projections have been inaccurate.

The system by which PCP payments are calculated is complex even by the standards of professional accountants, and customers can be left unsure of their position in the contract. Used-car pricing experts CAP are concerned that too many car buyers do not fully understand the contracts they are signing for PCPs. For example, customers are concerned that changing interest rates or a change in their circumstances may mean they can no longer afford payments. Consumers buying cars on finance are reminded to study the details of the small print carefully and clarify any points of doubt before signing a contract.

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