Benefits of automotive finance to customers

These are the key benefits of automotive finance to customers:

  • The means to acquire a vehicle and in many cases a higher value vehicle than would otherwise be affordable.
  • The means to acquire insurance, warranty and protection products and other services such as maintenance and servicing products.
  • Low initial payment/deposit and affordable regular payments, to suit individual cashflow requirements.
  • Fixed interest rates – to aid predictable budgeting.
  • Additional benefits through financial campaigns, such as low interest rates and other incentives.
  • Additional regulatory protection for regulated customers provided by legislation and Financial Conduct Authority (FCA) rules.
  • Some finance products remove the risks associated with depreciation.

Inflation

Motor vehicles are an expensive purchase and many prospective owners are unable or unwilling to save enough to cover their cost.

Borrowing can ‘hedge’ or protect against rising prices, known as inflation.

Inflation has the effect of reducing the buying power of money over time, so savers lose out during periods of high inflation because the value of their savings reduces (i.e. they can buy less with their savings because goods and services have become more expensive) .

Conversely, borrowers benefit from high inflation because the value of the debt they need to repay reduces when accounting for inflation (known as in ‘real terms’). This is because when inflation increases average wages tend to increase also. High levels of borrowing give consumers and businesses the funds to spend. This in turn leads to higher levels of inflation.

Attractive features of automotive finance

Using the facilities of an automotive finance provider can enable customers to achieve their wants and needs sooner rather than later.

Manufacturers know that lower monthly payments or low interest rates will attract customers by reducing the perceived cost of ownership.

The attractive features that manufacturers promote include:

  • low interest rates, interest-free in some cases;
  • deposit contributions;
  • Flexibility - longer terms, or the deferral of part of the vehicle’s cost to the agreement’s end - so long as the customer understands how these changes affect them.

Paying for a vehicle outright (in cash) vs using automotive finance

It is often less costly to use savings to fund a purchase than to borrow money. Interest rates on a personal deposit account are usually lower than rates charged for credit. The customer may pay more interest on the credit they receive compared to the interest they would gain from their savings. But vehicles are worth less over time (they depreciate) and some finance products protect against lower than expected vehicle values at the end of the term.