This report focuses on car purchases by private buyers. The market is divided into two main sectors — the new and used car markets — and four main types of lender: finance companies, manufacturers, subprime lenders and aggregators. Various types of finance are available to car buyers: personal loans, hire purchase (HP) and personal contract plans (PCPs). The right option depends on individual circumstances, and the market is increasingly competitive.
The motor finance market enjoyed strong growth between 2000 and 2004. The UK's strong economic background and price falls that have boosted the affordability of cars have supported sales of cars. Growth in the motor finance industry has been helped by declining borrowing costs and an increasingly competitive industry, which results in lower borrowing costs for consumers. However, considerable changes are being experienced. Direct lenders are entering the market aggressively, consumers are tending towards cash purchases and distribution channels are diversifying.
HP remains the main method by which consumers purchase new cars, while the proportion accounted for by personal loans continues to dwindle. PCPs appear to have reached a plateau after experiencing significant growth in the 1990s. Equity withdrawal is also now one of the main ways in which homeowners financed new car purchases between 2000 and 2004, although it is impossible to put an exact figure on how much consumers have spent on new cars by borrowing against their homes.
The motor finance market in the UK is highly competitive and no single player dominates. Consumers are able to arrange their finance through a plethora of companies, ranging from the high-street banks and building societies, to independent finance companies, credit unions and car companies' affiliated finance arms. Many of the high-street supermarkets, including Tesco and Sainsbury's, also offer personal loans.
It expects overall demand for new and used cars to slow significantly between 2005 and 2009, with new car sales falling in 2005 and 2006. Key Note does not expect the market to recover significantly until 2008. This reflects the likelihood that UK consumers will experience much tougher economic conditions over the next 5 years. Consumers have built up very large debts since 2000 and rising interest rates in 2004 and increasing unemployment in 2005 appear to have convinced many people to start paying off old debts rather than acquire new ones. Inevitably, this background will affect the market for motor finance and Key Note expects the market to contract in 2005 and 2006.
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