It may sound an obscure question, but consumer trends are evolving and the current generation of 20-somethings has a very different outlook on asset ownership than generations before.
In the current car market, around 80 per cent of privately owned vehicles are bought using PCPs, or Personal Contract Plans. The idea is that the owner pays a security deposit, followed by monthly ‘lease’ payments that effectively pay the depreciation of a car. At the end of the term, they have two options - pay the balance and keep it (which very rarely happens), or take out a fresh PCP on another brand new car.
The old car, meanwhile, gets sold on by the dealer as a used vehicle and everyone is happy. Well, in an ideal world at least. PCPs make new cars more affordable but also have risks attached - if the car sustains even minor damage, the owner has to pay a penalty charge. Likewise, if they go over their allocated mileage as the whole finance model is based on the car’s perceived future value.
And therein lies the rub. Today’s younger consumers have grown used to a different way of having the things they like - a sentiment partially driven by the high cost of housing, which makes home ownership something that many people in their Twenties don’t even think about. Instead, they rent. But not just houses. Via subscription services like Netflix and Spotify, they also lease their entertainment. Pay a monthly fee and you can watch or listen to as much as you like; don’t, and you can’t.
This, in turn, has seen a rising amount of people joining car clubs. In a recent UK survey on the sector, Barclays Consumer Finance discovered that the number of people in car clubs - where via a subscription they can simply take a car from a parking bay, use it and then return it - has risen by an incredible 766 per cent in the past two years.
These are companies such as Zipcar, Turo and easyCar, though the private rental sector is increasingly getting in on the act with companies such as Enterprise and Hertz also embracing the ‘co-mobility’ boom. There are over 32,000 car club members in the UK at the moment, and by the end of 2020, the study suggests that this number will double.
32,000 car club members and counting
With a level of growth that unprecedented, the market for used cars would contract massively. After all, why would someone pay out a large sum of borrowed money for an asset they only use when they need it, when by paying a subscription fee they never have to find the capital investment. Like their music, their television and their mobile phone, they can simply take a car wherever they need to go, whenever they need to, all for a fixed price that’s simple to budget for, with no added costs of repairs, insurance or taxes.
Of the 32,000 Brits currently using car club cars (a mere fraction of the number in the USA), every single one of them has eschewed car ownership for the new system, and that’s 32,000 people who are no longer in the market for a new or used car. But with over five million cars on PCPs in the same market, that’s a huge influx of used cars coming to the end of their terms every year.
“We have decades of data showing a long-term shift from the legal ownership of assets towards usage of them,” says Adrian Dally, Head of Motor Finance for the Finance and Leasing Association. “Thirty years ago, the most common approach to mobility was to own your car outright from day one, paid for in cash, or perhaps with a personal bank loan.
“In terms of societal attitudes to mobility, this follows a path we’ve seen in other asset classes. Mobile phones, music and TV equipment are similar examples. The popularity of the subscription bike service in London is a forerunner of this move away from ownership of mobility assets to usage. What we anticipate, particularly in urban areas, where consumers need limited and/or specific access to mobility, is increasing demand for new subscription models.”
This is all well and good, and from a lender’s point-of-view, there’ll still need to be some form of asset finance, either to the consumer to fund their subscription or to the companies supplying the vehicle fleets.
But there’s a void - and it’s a big one. Already, there are 32,000 people from the study sample who have decided to not buy themselves a car. That’s 32,000 potential used car sales that have disappeared altogether, which could have a devastating effect on the market and on the finance providers and consumers currently living in the PCP bubble.
And if that’s just the tip of the iceberg, the problem could be about to get a whole lot bigger…