Summary
Car leasing agreements usually last 2-3 years with monthly payments covering depreciation.
Personal contract purchase deals allow consumers to walk away if the car’s value drops below a minimum guaranteed value.
Negative equity can be rolled into a new financing deal, while positive equity can be used for the next purchase.
Car manufacturers are rationing petrol and diesel cars to prioritize electric models.
Vertu saw an increase in electric vehicle sales but a decrease in overall profits.
Article
Car leasing agreements typically last two to three years and are based on covering the predicted depreciation of the vehicle over that time period. This means that consumers pay monthly payments, minus a deposit, to account for the decrease in value of the car. Most of these agreements are personal contract purchase (PCP) deals, which include a “guaranteed minimum future value” at the end of the term, also known as a balloon payment. If the car’s value drops below this minimum value, consumers can usually choose to hand the car back and walk away.
In the case of negative equity, many dealerships offer options for consumers to add the value of the negative equity to a new financing deal or take any positive equity off the price of their next car. This helps to retain customers and can be a solution when the estimated worth of the car falls below the guaranteed minimum value. However, rising instances of negative equity have been highlighted as a potential concern for forecourt profits by Vertu, a company in the automotive industry. Despite this, car manufacturers are increasingly shifting towards electric models, with some dealerships experiencing a rationing of supplies of petrol and diesel cars in favor of electric vehicles.
Vertu reported an increase in electric vehicle (EV) sales by 10% in the first six months of the year, which was higher than the 7% drop in private sales of EVs seen across the industry. This shift towards electric models is reflected in the sales performance of the company, which saw an overall increase in sales from £2.3 billion to £2.5 billion. However, despite the increase in sales, profits for Vertu slumped from £37.8 million to £23.5 million, indicating potential challenges faced within the industry amid changing consumer preferences and market dynamics.
The trend of rising negative equity in car leasing agreements poses a potential threat to forecourt profits, as dealerships may need to absorb losses or find alternative solutions for customers with depreciating vehicles. The option for consumers to add negative equity to a new financing deal may impact the profitability of dealerships in the long run if this trend continues. Additionally, the shift towards electric vehicles by manufacturers can further complicate the dynamics of the automotive market, with dealerships needing to adapt to changing consumer demands and preferences.
Despite the challenges faced by the industry, there are opportunities for growth and innovation, particularly in the electric vehicle sector. Companies like Vertu are seeing increases in EV sales, indicating a growing market for electric vehicles. This shift towards environmentally friendly options presents new opportunities for dealerships to adapt and expand their offerings to cater to changing consumer preferences. By embracing this change and adjusting their business models accordingly, dealerships can position themselves for success in a rapidly evolving automotive landscape.
In conclusion, the automotive industry is experiencing significant changes due to shifting consumer preferences, with a particular focus on electric vehicles. Dealerships are facing challenges such as rising negative equity in car leasing agreements, which can impact profitability in the long run. However, there are also opportunities for growth and innovation, particularly in the electric vehicle sector. By adapting to changing market dynamics and embracing new technologies, dealerships can navigate these challenges and position themselves for success in a competitive and rapidly evolving industry.
Read the full article here
