Understanding the Subscription Approach to Car Finance

Understanding the Subscription Approach to Car Finance

The evolution of the car finance industry has, historically, been gradual. Hire purchase, a dominant force for decades, traces its roots back to the 19th century during the Industrial Revolution. This financing method, initially designed for machinery like sewing machines, has persevered through the years. Fast forward to the 1970s, control orders on hire purchases were implemented to curb consumer spending, requiring a substantial 33.3% minimum deposit, and limiting the repayment period to 24 months for items including cars. Imagining the same conditions today would incite significant public outcry.

Until the early ’90s, hire purchase was the primary consumer finance option in car showrooms, often featuring low deposits and repayment periods extending up to five years. Then came the emergence of Personal Contract Purchase (PCP), introduced by Ford Credit, and swiftly adopted by most other captive finance companies.

Originally conceived to enhance customer retention, PCP was exclusively available for new cars, encouraging quicker change cycles with repayment periods of 24 or 36 months. The introduction of the Guaranteed Minimum Future Value helped keep monthly repayments low. Over time, PCP evolved from a customer retention tool to a product marketed for customers to afford better cars with lower monthly repayments.

PCP was later extended to cover used cars, typically up to three years old. Presently, PCP commands an 85% share of the finance market for new cars purchased by private individuals, and it funds about 50% of cars in the used car market up to three or four years old.

When private customers step into a car showroom today, they are likely to be presented with a choice between hire purchase or PCP, depending on their preferences and usage. Personal Contract Hire (PCH), another option mostly offered for new cars, is a lease arrangement where the customer never owns the car. Like PCP, PCH terms are based on the assumed annual mileage but offer fewer end-of-term options and steep early settlement terms.

The New Kid on the Block: Subscription Model

Enter the subscription model, a recent addition to the car finance landscape. The COVID-19 pandemic prompted a reassessment of individual motoring needs. Many realized that car usage could be reduced, especially with the rise of working from home as a viable alternative to office-based work. Some families with two cars discovered that one was sufficient for their needs, with occasional requirements for an additional car for short periods. This shift created an opportunity for new entrants to offer alternatives to long-term car finance commitments.

Photo composite image of businessman using digital tablet next to smartphone

Subscription offers come in various forms, with some focusing on new cars and others on used cars. The appeal of the subscription model lies in its flexibility, allowing customers, in certain agreements, to switch to a different make or model during the contract period. However, this flexibility comes at a cost, and consumers may find it less attractive when compared to more traditional forms of finance. But does the subscription model have a place in the market?

Challenges and Considerations

One challenge faced by firms offering a subscription model is the logistical cost, particularly when customers opt for short-term contracts or change cars frequently. Additionally, the investment required to maintain a diverse fleet of cars can be significant. Some car retailers are beginning to offer subscription contracts by partnering with software providers for certain processes related to customer engagement. While new and near-new cars dominate these offerings, retailers could also include specific used cars held in stock for short-term subscriptions, ensuring optimal use of assets.

Given the current situation of long lead times for many new cars, a short-term subscription could serve as a viable option for customers reaching the end of a PCP contract. Instead of extending the agreement while waiting for their next car, customers can opt for a short-term subscription offer. Car retailers benefit from an established distribution network – their dealerships – with no substantial additional overheads. While nationwide groups have a distinct advantage, regional car retailers can also provide viable solutions for their local communities.

As the subscription model gains traction, retailers need to reassess their finance product offerings to cater to customers who prefer a ‘pay-for-use’ facility. This innovative product can appeal to a broader age demographic beyond millennials and Gen Z, tapping into the preferences of those familiar with product rental. Even older age groups are considering such options, especially in uncertain economic times, were committing to a longer-term agreement may be a concern. While proven products like PCP will continue to dominate the market, offering a more diverse range of consumer options is a positive development.

Choosing the Right Auto Lease Management Platform: A Crucial Decision

In the rapidly evolving landscape of car finance, the role of technology cannot be overstated. The adoption of advanced auto finance software and auto leasing software is becoming increasingly vital for businesses to stay competitive and meet the changing demands of consumers. The right auto lease management platform can significantly enhance operational efficiency, streamline processes, and provide valuable insights for strategic decision-making.

Selecting the appropriate auto lease management platform involves careful consideration of several factors. The software should seamlessly integrate with existing systems, ensuring a smooth transition and minimal disruption to daily operations. A user-friendly interface is paramount, as it empowers the team to navigate the platform efficiently, reducing the learning curve and enhancing overall productivity. Furthermore, robust security features are non-negotiable, given the sensitivity of financial data involved. Advanced encryption, multi-factor authentication, and real-time monitoring capabilities are essential components to safeguard against potential cyber threats.

Moreover, the chosen auto lease management platform should be scalable, accommodating the growth and evolving needs of the business. Scalability ensures that the asset finance software remains effective as the volume of leases and transactions expands. This adaptability is crucial in a dynamic market where flexibility and responsiveness can make the difference between thriving and merely surviving. The decision to invest in an auto lease management platform is not just a technological one; it is a strategic move that influences the overall competitiveness and future readiness of a business in the car finance industry.

In conclusion, the key lies in providing a finance product that aligns with customer needs. A comprehensive qualification process remains vital in the sales journey, ensuring improved customer outcomes. The subscription model brings a fresh perspective to car finance, offering flexibility and catering to the evolving preferences of consumers in a dynamic market. As the industry continues to adapt, understanding and embracing these diverse financing models will be crucial for sustained success.