How to understand the subscription approach to car finance 

Caption: The flexibility of the pay-per-use model does come at a price and people may be put off when comparing it with more traditional forms of finance. Credit: Getty Images

It could be argued that evolution in the world of car finance has been slow over the years. Hire purchase, which has dominated the market for decades, actually began in the 19th century when the industrial revolution created a demand for the financing of new machinery such as sewing machines. 

More recently, some of us can remember the control orders on hire purchases to slow down consumer spending in the 1970s. This covered many different types of equipment, and in the case of cars required a 33.3% minimum deposit and a maximum repayment period of 24 months. Can you imagine the outcry if those conditions were imposed today? 

Up to the early-90s, hire purchase was the only consumer form of finance offered in car showrooms, quite often with low deposits and repayment periods of up to five years. Then Personal Contract Purchase (PCP) was launched by Ford Credit, quickly followed by most other captive finance companies. 

The original idea of PCP was to improve customer retention and was only available for new cars. The aim was to encourage faster change cycles with repayment periods of 24 or 36 months, but with monthly repayments kept low by the introduction of the final payment (Guaranteed Minimum Future Value). 

Over the years, PCP was marketed as a product that could allow customers to buy a better car thanks to its lower monthly repayments, with retention taking a back seat. 

PCP was also adopted for selling used cars, usually up to three years old. Fast forward to today and PCP has an 85% share of the finance market for new cars purchased by private individuals, while the product funds around 50% of cars in the used car market up to three or four years old. 

These days, private customers that walk into a car showroom are likely to be offered a choice of hire purchase or PCP based on their personal requirements and usage. There are other options, such as Personal Contract Hire (PCH). Offered mainly for new cars, this is a form of lease where the customer never owns the car, and like PCP, terms are based on the assumed annual mileage. 

However, personally, I see no benefits to the consumer over PCP, which offers more end-of-term options, while there can be punishing early settlement terms on PCH. 

As well as hire purchase, PCP and PCH, there’s now the subscription model. The COVID epidemic made people review their motoring needs and many realised that car usage could be reduced, especially with working from home becoming an alternative to 100% office based.  

Equally, some families with two cars decided that one car was sufficient for their needs, but on occasions, they would require another car for a short period. This gave new entrants the opportunity to provide an alternative to long-term car finance commitments. 

Subscription offers vary, with some based on new cars and others on used cars. The flexibility of the subscription model can be attractive, with certain agreements enabling a customer to switch to a different make or model during the contract period. However, this flexibility does come at a price and people may be put off when comparing it with more traditional forms of finance. But will the subscription model have a place in the market? 

One of the drawbacks for firms offering a subscription model is the cost of logistics, particularly when a customer chooses a short-term contract or changes cars on a regular basis. In addition, the investment required to have a good choice of cars available can be daunting. 

A few car retailers are beginning to offer subscription contracts by having a partner providing the software and certain processes for customer engagement. New cars and near-new cars tend to dominate the offering, but retailers could select certain used cars held in stock for short-term subscription. ‘Sweating the asset’ is no bad thing and the car can be returned for retail at a more appropriate time to suit seasonal trends or certain market movements. 

With many new cars still on long lead times, a short-term subscription offer could be a good stop-gap for those customers coming to the end of a PCP contract and not wishing to extend the agreement while waiting for their next car.  

Car retailers obviously also benefit from a ready-made distribution network (their dealerships) with no meaningful additional overheads. Naturally, the large nationwide groups are best placed, but regional car retailers could also provide a highly acceptable solution to their local communities.  

Retailers need to examine their finance product offering to satisfy those potential customers that prefer a ‘pay-for-use’ facility. This new product can also be attractive to a wider age demographic than just millennials and Gen Z, to which product rental is second nature.  

Older age groups are also considering their options, especially in these uncertain economic times when entering a longer-term commitment may be a concern. While I believe that tried-and-tested products such as PCP will continue to dominate the market, having a wider consumer offering has to be a good thing. 

Ultimately, the key is providing a finance product to suit customer needs, so comprehensive qualification remains a vital ingredient of the sales process and will deliver improved customer outcomes. 

This article first appeared as a blog post on the Institute of the Motor Industry website