Go back to the future with used car PCP finance

Article author: Debbie McKay
Position: commercial director motor sales, MotoNovo Finance

In the face of a rapidly changing retailer profit model at MotoNovo, our commitment to long-term relationships with retailers continues to lead to great dialogues with them about how to embrace the evolving landscape. The recent re-emergence of negative equity – and the challenge of sourcing used car stock – has led to some very productive conversations. Specifically, these conversations have been around the role of used car Personal Contract Purchase (PCP) finance and the opportunity of optimisation. Not for the lowest monthly payment, which is fraught with risks as we see from the increasing negative equity position, but to optimise three other areas centred on longer-term success: customer retention; customer lifetime value (LTV) and access to quality part exchange stock

Optimising retention and value

Car retailing often focuses on short-term outcomes and issues. However, apart from the run-up to changing cars, consumers’ focus on their car ‘ownership’ journey is usually longer term, reflecting their financing and aftersales needs. It is by looking again at PCP finance agreements – particularly, in this instance, used car PCPs because their promotion is retailer-driven – that I believe retailers can enhance their customer retention, lifetime value and used stock acquisition.

At the heart of this scenario is a different view of PCP optimisation, focusing on the broader gains of lifetime value, retention and future part-exchange stock rather than the lowest monthly payment.

An article published earlier this year – titled ‘Personal Contract Purchase car finance deals explained’ – went on to reveal that ‘Dealers also benefit from PCPs because they are designed to incentivise owners to stay with the same brand and return to choose a newer model every three years or so’.

While I recognise the importance of making the sale to keep the business wheels rolling, I suggest that the retention benefit within PCP finance has been a little overlooked. As my title suggests, we may need to revisit this benefit to help underwrite the future.

The role of PCPs in used car sales 

The primary appeal of a PCP finance agreement for a customer buying a used car is the potential for lower monthly payments compared to a comparable hire purchase or personal loan agreement. 

However, while focusing only on providing the lowest monthly payment, courtesy of a very high guaranteed future value (GFV), may help reduce the customer’s monthly payment, it will also see the customer paying more interest charges. It may also fall short of delivering the type of good customer outcome that will help enhance customer retention and lifetime value. This situation is something we have started to see reported in recent weeks with the return of negativity on PCP agreements, where very high GFVs risk creating future problems for customers and retailers.

The return of negative equity

Very ambitious GFVs and falling used car values over the last 22 months have been a toxic combination that has resulted in negative equity for many customers. The impact is evident with increasing voluntary termination levels. 

In mid-October, Vertu Motors’ chief executive Robert Forrester commented on the rising negative equity situation, saying it “puts a brake on the new and used car market”. The emerging negative equity situation is not limited to electric vehicles.

Under a negative equity position, besides any excess mileage and condition costs, customers may be protected from financial loss should their PCP agreement run its entire course. However, they will have no equity in the car – and such equity is critical in driving the customer back to the same retailer. For the many people whose finance agreement does not go to full term, the negative equity impact will hit sooner – and possibly harder. Their ability to change car, certainly on a like-for-like basis, will be impacted greatly. 

The role of GFVs in customer retention

GFVs provide an important buffer for all parties to manage relationships over time. Being too aggressive in pursuit of the lowest monthly payment possible, which is reliant upon a high GFV, invariably makes it much harder to retain customers. Equity will, at best, be reduced compared to a more conservatively set GFV – and the likelihood of negative equity will increase. It risks damaging trust between customers and dealers/car brands.

A more conservative GFV, on the other hand, would enhance the retention potential for a modest increase in the monthly payment, which would be accompanied by a reduced cost of credit. Explaining this situation transparently to customers can only help build trust.

When structuring a PCP agreement, an eye to the future can be helpful instead of assessing the present only. 

A focus on lifetime value starts at the point of sale. That means you should:

·   Tie up the need for correct OEM servicing as part of the used PCP sale with a service plan

·   Offer a tyre rotation service to maintain regular customer contact

·   Have a clear eye on the part-exchange value of the car and be open about this with the customer

·   Structure the PCP agreement to optimise end of agreement equity.

At the end of the agreement, used PCP customers have three options: retain; return or replace. Experience demonstrates that customers with equity in the car are far more likely to return to the original supplying retailer and enter into a further agreement with them.

Once in the showroom, retailers can bring the ‘retain, return, replace’ options to life for the customer. If they want to retain the car (unlikely if it is in a negative equity position), refinancing can be possible. If they wish to return it, the retailer is in pole position to buy valuable stock without it going to a broader market. If they want to replace it – well, it’s a new sales opportunity.

The retention opportunity all starts in the showroom, by taking the time to explain the product and agreeing on an annual mileage that meets the customer’s needs. Sales staff should also provide details on the end-of-agreement options, the need to ensure the car is maintained correctly and work with the customer to outline the benefits of targeting end of agreement equity to optimise their future options. 

Get this right and the seeds will be sown for a long-term relationship.