A total of around 320,000 new and used cars with a total value of just over £5 billion were purchased using finance deals of various kinds during March.
Of these vehicles, around 200,000 were new. At £3.6 billion, the total value of these new cars was 13% more than the same figure for March 2016, and a new record high. It is thought that a lot of customers were rushing to register new cars in March in order to avoid tax changes that made several types of vehicle more expensive to own, effective from the beginning of April.
The changes to vehicle excise duty (VED) were first announced during the 2015 Summer Budget as part of an effort to cut down on carbon emissions from motor vehicles. Under the previous system, eco-friendly vehicles including particularly low emission and hybrid cars were exempt from VED. Under the new system, only cars with zero emissions (fully electric or hydrogen vehicles) will be exempt. Owners of all other cars will pay between £10-£2,000 during the first year it is registered, depending on CO2 emissions measured in g/km2. Thereafter, all cars worth under £40,000 will elicit a £140 annual fee, and for any cars worth more than £40,000, an additional premium of £310 will be due during years two to six.
Since the changes only apply to cars registered on or after 1st April, potential buyers who rushed their purchases through in March could have saved rather a lot.
While the VED changes meant a particularly sharp jump during March, car finance figures for the preceding year were still high – with a total value of £32.5 billion across new and used cars, an increase of around 10% compared to 2015.
Some concern has been raised about high levels of car purchased using finance deals, typically Personal Contract Purchases (PCPs). With a PCP, you pay a deposit, usually worth around 10% of the vehicle’s value, and then you are lent the remainder, which you pay off (plus interest) over a set period. At the end of the loan term, you’ll be given the option to buy the car outright for an pre-arranged fee known as the guaranteed minimum future value (GMFV). Alternatively, you can give the car back to the dealer or, if there is a positive gap between the GMFV and the actual value of the car, you will have the option of using that equity as all or part of the deposit on a new PCP.
Should you wish to cancel your PCP early, you’d need to pay the difference between what you owe, and the actual value of the car. So if you choose to settle when the actual value of the car is, say, £10,000, but the GMFV is set at £11,500, then you’ll need to pay that extra £1,500 if you choose to leave the deal early.
Part of the concern about the surge in PCPs is to do with the depreciation on the vehicles in question, diesel cars in particular. The government is currently taking more and more steps to crack down on diesel usage due to its only reasonably recently discovered toxicity and environmental unfriendliness. Because of various policy changes, diesel cars are expected to decrease in value quite sharply, with some estimating that the average diesel car will drop in value by 15% a year. This could leave several drivers stuck in negative equity, leaving them far out of pocket if they leave their deal early.
Ultimately though, if the driver sees the deal through to the end, then it is the manufacturer/dealership that will lose out, as the GMFV is a guaranteed price.
Joanna Elson, the head of the Money Advice Trust, urged consumers to make sure that they will be able to keep up with payments if they are considering a PCP.
She said: “For many consumers [car finance deals offer] access to a car that would otherwise be unaffordable, however it is important that the affordability of offers is fully assessed and that consumers are clear on the terms so that they know from the outset what they are committing to, and can plan accordingly.”
Meanwhile, Adrian Dally, the head of the Finance and Leasing Association, argued that car finance lending is “responsible”.
“This is a sustainable model going forward,” he told the BBC.