Four-year persronal contract purchase (PCP) agreements could trigger a contraction in the UK new car market, former Lookers managing director James Brearley has warned.
Brearley, who left Lookers as MD in April, said manufacturers had increasingly moved from two and three-year agreements to 48-month terms to make monthly payments more affordable following the sharp rise in new car prices since the pandemic.
He estimated that around 65% of advertised PCP offers were now based on agreements lasting close to four years.
Writing on LinkedIn, Brearley said the change was supporting new car demand in the short term but could delay replacement cycles and reduce the number of customers returning to dealerships over the coming years.
He said: “The market is locking out consumers for at least another year in order to fuel a short-term counter-economic boost in sales.
“At some point that is going to bite with market contraction and that is when the bubble bursts and experience matters most.”
Brearley indicated that he is preparing to return to the motor retail industry and “cannot wait to get back out there” as his non-compete restrictions come to an end.
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Brearley said the motor finance model had previously been built around PCP agreements lasting between 24 and 36 months, with enough equity remaining to allow customers to change their cars after around two and a half years.
Moving customers onto four-year agreements could keep them out of the replacement market for at least another year, creating a future gap in demand.
His warning comes despite strong trading conditions across new cars, used vehicles and aftersales.
Brearley highlighted year-to-date growth in the new car market and described August as the strongest for three decades.
He said private buyers were being encouraged into the market by more affordable monthly payments and increased competition from Chinese manufacturers.
Higher fuel prices were also strengthening the case for electric cars, while customers were trading both up and down according to their financial circumstances.
Dealers urged to prepare for market and margin contraction
Brearley expects September to deliver further growth and believes the largest dealer groups should finish ahead of the previous year unless they have significant operational problems.
However, he said uncertainty around taxation and the economy could weaken consumer confidence during October.
While that could encourage more buyers to seek lower monthly payments and electric cars, Brearley believes the growing dependence on longer PCP agreements will eventually cause the new car market to contract.
He said dealer groups best placed to manage that downturn would be those that conserve cash, use technology to reduce costs, maximise the value of used vehicles and invest in aftersales capacity.
Brearley added: “As always, only the strong survive market and margin contraction.”