We take a look at what Brexit means for car finance in the UK. Has Brexit made it more sensible to lease than buy, and will Brexit increase costs?
We’re pretty confident that the entire country has had enough of hearing the word ‘Brexit’, but since media coverage has moved on to other issues we thought it might be a good time to revisit the situation.
We’re looking particularly where car retailers, leasers and finance funders are seeing the industry in the years to come, and whether our opinions about the norms of car buying have altered.
So what is the current situation?
Essentially it hasn’t changed a lot since the vote, as nothing can really happen until we know whether the UK will remain within the European Economic Area or will completely sever all ties with mainland Europe. This will be a pivotal moment as where the Great British Pound stands against other currencies has a great impact on their ability to trade with us in the future, affecting the value and ultimately the cost of importing and exporting vehicles and parts, as 77.3% of British-made cars are exported to EU member states.
So far there hasn’t been a mass exodus of car manufacturers from the UK and the report is that actually “no UK-positioned automaker has said it will alter its investment plans”1 and will continue to trade as normal if until there is a need to change course.
Why is the auto industry still worrying then?
The worry isn’t necessarily about if Britain will cut its ties to Europe, it’s the uncertainty surrounding what will happen if that does occur. Analysts, lawyers and economists can estimate what might happen to the industry, the UK and the worldwide economy, but if the UK does sever all its ties then internationally-based car makers within the UK and the EU could struggle to make trade agreements between them affordable and profitable, and if they do it could take a long time to regain them according to investment bank RBC Capital Markets, “it could take years and a lot of capital to get supply chains back to more cost-efficient levels”1.
Furthermore, the situation for Europe is still uncertain as although the car market is currently fairly strong, there is still the lingering effects of the past recession that have not yet been 100% overcome, making it vulnerable worldwide still with experts confirming this risk, saying “Europe went from the most profitable region in the world in 2007 to the least profitable”1 after the ever increasing safety and emissions regulations impacting on profits as well as the risk of rising prices now.
What does this mean for other forms of obtaining a car, such as leasing?
Again, nobody really knows so all we can do is speculate, but it does seem as though with pressure piling onto the car retail sector that the door could be left open for finance and leasing companies with lower overheads and better deals to get their feet in.
Because the pound has dropped against both the Euro and the Dollar giving it a lesser value it means manufacturers and finance companies need to safeguard their revenue by putting prices up slightly. It could also be said that buying a car could be more of a risk now that there is wide financial uncertainty, which could again lead to price rises.
Let’s explore this further.
If car salespeople are eager to shift vehicles then they can give car leasers discounted rates on batches of units or stock units, meaning leasers can provide good deals to customers, making them more appealing. As well as that if the pressure continues to build on car retailers then leasers have leverage to instigate deals on units that aren’t selling as fast as others because leasers often already have good working relationships in place with dealerships, meaning the retailers can offload the pressure and use the leasers as a ‘plan B’. However, could continuing price rises mean that eventually leasing prices exceed affordable amounts, leaving leasers to face the same fate as the retailers?
A positive is that the UK is a great place to build cars.
“Even when the pound isn’t as strong against the euro and other currencies, the appeal of British made cars is sufficient to keep sales buoyant”, implying that we shouldn’t underestimate our car market, “having been a strong leader in moving the bar higher for safety, quality and environmental standards”2 across the continent.
But why would customers turn to leasing instead of other finance options?
The most significant reason that customers would lease a car instead of buying or PCP (Personal Contract Purchase) would be because on paper leasing presents the lowest risk as you will never own the car yourself, so you are removing any investment and risk you could have in that asset.
You’re essentially throwing less money down the drain by leasing than you are by owning and that is where the attraction of leasing stems from, along with getting a much better brand new car than you could afford through buying, and once the leasing term ends you simply hand the car back stress and worry free.
This continues within the business leasing sector also, where companies providing company cars or commercial fleets will like the idea of adding new cars but without having to commit to buying them, when leasing them means every few years they can have new commercial vehicles which have the latest Euro 6 engines, low emissions, high fuel economy, and personalised with their signage. No investment needed and minimal risk to business operations.
Taking all of these possibilities into account is important as we don’t know what the outcome might be, “if they negotiate new trade deals that are very close to what they have now, the panic may be for naught. The question is: what’s going to replace this? The answer is: nobody knows. Until we know what replaces it, we don’t know how scared we should be.”1
But, our current and continued reality is not one to panic about, in fact quite the opposite, we should look with optimism into the future, as our car industry has faced and overcome great challenges before which has changed it for the better.
- Automotive News, Gibbs, N., 10 questions about Brexit’s impact on the auto industry [online] 2nd July, 2016. Available at: http://www.autonews.com/article/20160702/OEM/307049963/10-questions-about-brexits-impact-on-the-auto-industry Sourced: 23/08/2016.
- Contract Hire and Leasing, Suttee, Alisdair., How would Brexit affect the uk car industry? [online] 23rd February, 2016. Available at: http://www.contracthireandleasing.com/car-leasing-news/brexit-uk-car-industry/ Sourced: 23/08/2016.