New car finance

Car finance: 3 in 4 Brits use it but 2 in 3 can't explain it

New car financeBritish car buyers do not understand common car finance terms such as personal contract hire, personal contract purchase and gap insurance – despite 77% of new car sales now using car dealer finance.

New car finance actually grew once again last month, by more than 10%, but two in three Brits do not feel confident explaining commonly-used car finance jargon.

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The survey of more than 1,000 car buyers, by BMW Group Financial Services, discovered that just 18% of car buyers can explain personal contract hire (PCH) and less than 20% can explain personal contract purchase (PCP).

This is despite some brands claiming nearly 9 in 10 sales are made via PCP.

Indeed, 28% of new car buyers admit they can’t explain any car dealer jargon.

“These results go a long way to illustrating the state of the nation’s knowledge about finance,” said BMW Group Financial Services’ general manager Suzanne Gray.

That, she says, is why the financial firm has simplified all its car finance terms – and Gray hopes other providers will now do the same.

“Simplified motor finance is long overdue and we are responding to a public need for clear terms.”

Last month, new car sales grew once again – and they’re up 7% thus far in 2015 compared to the same period last year. Nearly 40 consecutive months of growth in new car sales has now been achieved.

The five most commonly misunderstood new car finance terms

  1. PCH (personal contract hire): An upfront payment scheme with regular monthly hire payments: you rent the car rather than buy it outright
  2. GAP insurance: covers you for any shortfall if your car is written off while you’re still paying the loan
  3. PCP (personal contract purchase): Similar to PCH but monthly payments are only the car’s depreciation rather than the full amount (see below); At the end, you can buy the car, give it back, or use the equity towards a new car
  4. GMFV (guaranteed minimum future value): How much the car will be worth at the end of a PCP; monthly payments are the difference between the purchase price and the GMFV
  5. Deposit contribution: A dealer incentive offered for those who take out dealer finance