Car finance – The rise of the PCP

The business of finance is becoming more important to the long term profitability of car dealers and with traditional finance packages such as HP and personal loans leaving buyers of new and used cars susceptible to the negative equity trap, Personal Contract Purchase’s (PCP’s) are actually increasing in popularity. With the recent news that despite consumer leasing of new cars falling by 36 percent by value compared to the previous year, Personal Contact Purchases were up by 3 percent, which in the current market is pretty impressive.
Although they may seem to be a good package for customers they are also much more profitable for dealers and businesses are being measured on the amount of these policies they sell. So what exactly is a PCP and where did it originate? This is the view of one of our insiders who was there at the beginning;

In 1991 whilst working for Perry’s, a Ford dealership, we had to attend a training course for a new style of car purchase which was being branded as “Options”. This turned out to be the original trading name for the PCP. At the time new car sales were in an all time slump with salesmen losing deals for something as trivial as a set of rubber mats to customers trawling from dealership to dealership battling to get the best price.
The motoring journalists had kindly informed the general public that there was a gross profit of 17% in new vehicles and that the standard fleet discount for large groups was 15% so as sales staff we all had become used to the opening gambit from each price shopper as “ I want 15% discount!”.

The “Pendle System” (a controlled selling tactic brought over from the US to enable all sales managers’ total control of their sales staff, using various tactics) was in full force then and relationships between the customer and the sales staff were at an all time low. For both parties it was an extremely uncomfortable approach.

The other great blight at the time was long term finance, it was possible to finance a car for a 60 month term and with depreciation kicking in the moment you drove away from the garage it was almost impossible to sell a customer a new car using his old vehicle as part exchange until at least 4 years had elapsed.
Ford’s “Options” Scheme provided customers a more beneficial way to buy a car. The training course was run by the company which conceived the concept of “Half a Car”. It was explained that the founder of the company was a car salesman in the US who was having a tricky month and in order to close a deal he agreed to buy back the car as part-exchange in two years time and at a pre-agreed price, this was detailed on the order form and the customer purchased the car. 24 months later the customer returned to the dealership to purchase a new car waving the previous order form with its guaranteed part-exchange value. After a little bit of number crunching the salesman, to his surprise, was able to fulfil his obligation to the customer who happily drove away in his nice brand new car. Ok this all sounds like the stuff of legend but this apparently was the origin of the PCP.

The difficulty in the UK was that customers took great pride in vehicle ownership, still cleaning them themselves on a Sunday and banning anyone other than their most trusted of friends or family even to sit in the driving seat. So to present a finance package that kept monthly payments at the equivalent of a 48 or 60 month term but with the ability to change your car every 24 or 36 months and sacrifice ownership was not as easy a task as you might expect.

This hurdle was covered by giving the customer 3 options (hence the name of the product);

Using the 2 year agreement as an example, after 22 months have elapsed the customer would bring the car back to the dealer, have it appraised and valued and they could then choose whether to;

1: Use the difference between the GMV (guaranteed minimum value) and the part-exchange price as a deposit and order a brand new car.

2: Refinance the GMV and keep the car.

3: If the market for a particular car has slumped and it is now worth less than the GMV simply hand the keys over and let Ford suffer the loss.

I clearly remember being taught to deliver this pitch in a precise manner with the trainer stressing that “words are critical” at various stages of the presentation. The imperative was to simply placate the customer’s desire that the actual ownership of the car was not in jeopardy.

The PCP was quickly adopted by each of the manufacturers using their own unique branding and has become the most effective buying scheme since the arrival of basic Hire Purchase.

Today modern customers understand that cost of ownership is more important than owning a hugely depreciating commodity and the PCP has become the norm in retail vehicle purchasing. It was a classic win / win for the customer and the dealer, with customers driving brand new cars for affordable monthly payments and dealers having the opportunity to sell a new car every 2 years rather than 4.

In the current climate it looks like the business could do with another inspired idea and as necessity is the mother of invention that idea may be just around the corner.

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One Response to Car finance – The rise of the PCP

  1. charlotte taylor May 31, 2009 at 10:01 pm #

    we purchased a car from the car shop two years ago we have recently gone to trade it in for a van we were under the impression that we had taken it out on h p so we were told that after half the term we would be able to take it back and walk away from the deal when we recently took it in they said it was taken out under the personal loan business so had to pay full term we feel totally conned is there anything we can do

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