Finance scheme boosts car sales

A special finance scheme growing in popularity is helping to boost new car sales, which have risen to their highest level in six years.

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The personal contract purchase plan has led to a substantial rise not only in car sales but in sales involving some sort of finance scheme.

A special finance scheme growing in popularity is helping to boost new car sales, which have risen to their highest level in six years.

The scheme is the personal contract purchase (PCP) plan which has led to a substantial rise not only in sales but in sales involving some sort of finance scheme.

The number of new cars registered in 2013 rose 10.8% compared with 2012. More marked still is the rise in the number of vehicles bought under a finance deal, with such schemes now representing 74% of all sales compared with only 46% in 2006.

PCP is a variation of a hire purchase agreement but the key difference is that the value of the car at the end of the contract is calculated at the start of the agreement and this value is deferred.

This method is thought to be id eal for people who want lower monthly repayments and prefer to change cars on a regular basis.

"PCP is getting more and more popular and is different to a personal loan," said Finance and Leasing Association (FLA) communications head Andrea Kinnear.

She went on: "With this type of agreement the risk is different and you can get some very, very good deals. You go to a dealership and you choose a PCP plan. There may be an initial fee but that's agreed in front of you.

"You then sort out a monthly payment plan over a set amount of time. At the end of the agreed period you can either buy the car outright or, if you choose not to, you can had it back and you could then enter another PCP scheme with another new car."

The FLA explained that the deferred sum for the new car is usually referred to as the guaranteed minimum future value (GMFV) and is based on a number of factors including how old the car will be at the end of the agreement and how many miles it is expected to have covered.

The future value of the car is guaranteed by the lender so will not fluctuate. Deferring the GMFV to the end of the agreement in this way means that your regular monthly payments are lower than those on a comparable hire purchase agreement over the same term.

Society of Motor Manufacturers and Traders communications head Keith Lewis said: "All our members want to give people packages that work for them and consumers have grown entirely comfortable with monthly-payment schemes with many using them for their mobile phones.

"One of the benefits of PCP is that after the set period you can just get another car. You never suffer from depreciation. The whole process gives people manageable monthly costs."

The FLA said that in 2009 PCP accounted for 53.3% of the £5.99 billion provided for motor finance and in 2012 it accounted for 63.8% of £9.40 billion of car finance.

The FLA also produced a table showing the p ercentage of private new car sales bought on finance schemes provided through dealerships:

YEAR PERCENTAGE

2003 56.5

2004 48.6

2005 47.3

2006 46.0

2007 52.0

2008 58.6

2009 * 47.5

2010 54.0

2011 63.5

2012 71.2

2013 ** 74.2

* Dip in 2009 due to scrappage

** Estimate based on latest figures for 12 months to October 2013