INGENI AUTOMOTIVE FINANCE PRODUCT KNOWLEDGE. U N I T 2 : C o r e F i n a n c i a l P r o d u c t s w o r k b o o k

Transcription

1 INGENI AUTOMOTIVE FINANCE PRODUCT KNOWLEDGE U N I T 2 : C o r e F i n a n c i a l P r o d u c t s w o r k b o o k

2 UNIT 2 CORE FINANCIAL PRODUCTS INTRODUCTION This module covers the most common methods of purchasing a vehicle from a dealership. It includes: Hire Purchase Agreements; Personal Contract Purchase; Personal Loans HIRE PURCHASE AGREEMENTS 1.1 Definition The customer hires the vehicle from the finance company for an agreed period of time at an agreed monthly sum. The customer can gain ownership (title to the car) by paying an Option to Purchase fee, at the end of the agreement. 1.2 Structure The agreement is a Tri-Partite Transaction as previously explained. A hire purchase agreement is one of the most common ways of financing a vehicle purchase and is normally a fixed cost, fixed period, loan of money linked (or secured) to the purchase of a vehicle. Debtor (customer) The customer decides how much of a deposit to put down (unless determined by the lender) and then pays off the amount borrowed (balance) plus interest, normally on a monthly basis over an agreed period of time. This can be 2-3 years but can be as much as 5. June 2014 Page 2 of 9

3 At the end of this period, and once the Option to Purchase fee has been paid, title of the vehicle is transferred to the customer who then becomes the legal owner. Supplier (dealer) Usually offered at the point of sale by the sales executive or business manager. The dealer supplies the vehicle to the customer but it is financed by the creditor/lendor. Creditor (lender) The finance company retains legal ownership (the title) until all the payments and Option to Purchase fee is paid by the Debtor (customer) 1.3 Common Factors Deposit Normally optional (or a minimum/maximum amount may be set by the lender) and can be paid in cash or if the customer trades in an old vehicle as part-exchange. This increases the security the finance company has in the vehicle and reduces the amount borrowed (and payments) by the customer. Option to Purchase fee This amount is decided before the agreement is entered into and results in the customer taking ownership of the vehicle. It is set by the individual lender and is usually paid at the end with the final payment. It is optional, however, and the lender retains title to the vehicle if not paid. Regular payments The customer agrees to make regular payments to the finance company under the terms and conditions of the agreement and should keep the vehicle fully insured and in roadworthy condition. There are no mileage restrictions under a Hire Purchase agreement but the lender may impose certain conditions on the use or location of the vehicle, e.g. no business use or travel outside of the EU. Fees Included in the regular payments can be an arrangement fee set by the individual lender. Any fees can be included as part of the regular repayments. Balloon payment Monthly/regular repayments can be reduced with the inclusion of a balloon payment as it defers a proportion of the amount owed until the end of the agreement. June 2014 Page 3 of 9

4 1.4 Ending the Agreement A Hire Purchase agreement can be settled at any time by the customer by paying the balance of finance outstanding and the Option to Purchase fee to the lender. The lender may allow the customer a rebate of the interest if the outstanding finance balance is settled before the agreement end date. At the end of a Hire Purchase agreement, once all the contracted payments have been made, the customer will usually pay the Option to Purchase fee and take legal ownership of the vehicle (title). However, this is a true option. The customer could return the vehicle to the finance company if the customer so desired (even though the vehicle has effectively been paid for). During the period of the agreement, the customer may decide to end it. Depending on how much has been paid to the lender at this point, the customer may be able to walk away from the agreement and hand the vehicle back, with no penalty. Normally, this amount needs to be over half of the total amount owed and the vehicle must have been kept in a reasonable condition. 1.5 Summary HP is one of the most common motor finance products in the market; The finance loaned to the customer is secured against the vehicle sold. Title to the vehicle remains with the finance company until the Option to Purchase fee has been paid. Title then passes to the customer; Agreements are simply structured, normally up to a maximum of 5 years; Flexible deposits and periods are set to meet a customer s budget; Retaining title until the end of agreements gives lenders more security in the event of payment problems. The lender can also offer the customer more attractive terms and conditions because they retain title until the customer has paid off the agreement/vehicle in full June 2014 Page 4 of 9

5 2. PERSONAL CONTRACT PURCHASE A GREEMENTS (PCP) 2.1 PCP versus HP Agreements A Personal Contract Purchase is a purchase agreement with one main difference a predicted minimum future value (balloon payment) is offset until the end of the agreement. This is called a Guaranteed Minimum Future Value (GMFV). This is set and agreed by the manufacturer or finance company and allows the customer to know the least amount the guarantee will be worth at a point in the future. 2.2 Structure Debtor The customer agrees to make regular payments to the (customer) creditor. Supplier (dealer) The finance facility is usually offered at the point of sale (dealer showroom) by the sales executive or business manager. The dealer also supplies the vehicle to the customer. Creditor (lender) The finance company guarantees the minimum the vehicle will be worth at the point in time when the agreement ends (subject to mileage and condition). This GMFV is determined based on existing market intelligence on vehicle valuations, the customer s anticipated mileage over the life of the finance agreement and the length of the agreement itself. A Personal Contract Purchase (PCP) is a loan to purchase a vehicle and is usually based on a HP or Conditional Sale contract. However, PCP differs from these traditional funding methods because of its payment profile and structure. The repayments made by the customer are determined by the size of deposit, the mileage the customer expects to drive during the length of the finance agreement and the term of the agreement. A very popular form of vehicle financing, PCP is normally a fixed cost, fixed period loan of money that is linked (or secured) to the purchase of a vehicle. It differs from traditional loans in that a balloon payment is always due at the end of the agreement. However, this amount is predicted and set by the finance company before the customer enters into the agreement. The balloon payment in PCP agreements is known as the Guaranteed Minimum Future Value (GMFV). June 2014 Page 5 of 9

6 2.3 Common Profiles The deposit is deducted from the price of the vehicle at the start of the agreement. The customer is then required to pay fixed monthly payments over the term of the agreement and then pay the final GMFV before receiving title to the vehicle. The fixed monthly payments include interest on the full amount including the GMFV but excluding the deposit paid. Typically a PCP agreement will last for 2 or 3 years. Deposit Each lender will advertise any minimum or maximum deposit requirements for their own PCP. It is common for this to be very low to help. Option to Purchase fee Fees Regular payments GMFV There is usually an agreement fee charged by the lender that can be paid at the start of the agreement or included as part of regular payments for the term of agreement. The fee amount is set by the individual lender. If the PCP is based on a HP contract there will also be an Option to Purchase fee to pay if the customer wants to keep the vehicle at the end of the agreement. 2.4 Ending the Agreement A PCP can be settled by the customer at any time if they pay the outstanding balance, including the GMFV to the lender. The lender may allow the customer a rebate of the interest remaining on the agreement. At the end of the PCP agreement the customer has three options: KEEP The customer can pay the GMFV (plus any Option to Purchase fee that is part of the agreement) and keep the vehicle. At this point the customer will become the legal owner. Many finance companies allow the GMFV to be refinanced to avoid the customer having to find a large amount of cash. June 2014 Page 6 of 9

7 HAND BACK PART EXCHANGE If the vehicle is worth less than the GMFV, the customer can return the car and walk away subject to mileage and condition. The finance company will absorb any loss because there is a guarantee on the final value of the car. If the vehicle has exceeded the agreed mileage then a pence per mile charge plus VAT will apply to each mile over the contracted amount and the customer is required to pay this additional charge. Also, if the car has not been maintained or serviced according to manufacturer s recommendations, or if the condition is worse than fair wear and tear, the lender will charge the customer to compensate for this condition. All charges are laid out in the terms and conditions of the agreement If the dealer s part-exchange value for the vehicle is greater than the GMFV, this sum (also referred to as equity) can be used as a deposit towards the customer s next finance agreement for a next car or received as cash-back. Alternatively, the customer can sell the vehicle privately, settle the GMFV by paying the outstanding amount to the finance company and keep any profit. 2.5 Summary A very popular and flexible way of purchasing a vehicle that is structured to allow a customer to change into a vehicle of their choice, at a time of their choice. Finance provided by a lender is normally secured against the vehicle that is provided by using a HP or Conditional Sale contract. The finance company will remain the owner of the vehicle (retain title) until the customer has paid the total balance owed, plus any charges, under the terms and conditions of the agreement. The GMFV (balloon payment) provides the customer with the piece of mind that they will not be out of pocket should the car be valued below the GMFV (and therefore worth less than is owed) at the end of the agreement (subject to the condition of the vehicle and mileage when returned). It allows customers an affordable, low-risk funding package that has the flexibility to meet their driving needs now and in the future. It is a real alternative to traditional funding. June 2014 Page 7 of 9

8 It allows the customer to know the least amount the car will be worth at a fixed-point in the future. The customer is in control of the options available at the end of the agreement. PCP agreements can be Regulated or Unregulated under the CCA. 3. PERSONAL LOANS 3.1 Introduction Personal loans are an unsecured lending facility that can be used for almost any purpose such as home improvements or to buy a car. A personal loan is normally a fixed cost, fixed period loan of money to purchase any item the customer wants including vehicles. 3.2 Structure A personal loan is not a tri-partite transaction as the lender provides the loan facility but not the vehicle. The customer buys the vehicle directly from the dealer using the loan borrowed. The customer will immediately take ownership of the vehicle. Debtor (customer) If the customer could not afford to keep making the repayments owed, the lender would not specifically look to repossess the vehicle that was funded with the loan. Instead, all of the customer s personal assets may be at risk. This is one of the disadvantages for customers opting for unsecured finance agreements rather than secured. Personal Loans are normally aimed at employed individuals, but may also be available to Sole Traders and small Partnerships for business purposes. Supplier (dealer) Not involved in a personal loan Creditor (lender) The facility is widely offered by banks, building societies, direct lenders and finance companies. The facility is usually offered by direct advertising in the press and other media by banks and direct lending organisations (where there is no credit intermediary involved). June 2014 Page 8 of 9

9 3.3 Common Profiles Some motor finance companies also offer personal loans in motor dealerships. These are offered by Sales Executives or Business Managers. No deposit Regular payments Fees Usually, the higher the amount loaned to the customer the higher the risk to the lender. The payments are usually made monthly in arrears but there are sometimes holiday periods advertised to attract customers where no repayments are due for a specific number of months. An arrangement fee is usually set by the individually lender and can be paid at the start or incorporated into the regular repayments. 3.4 Ending the Loan The customer can pay the balance outstanding at any time to the lender and end the agreement. The lender may allow the customer a rebate of the interest remaining on the agreement. The agreement ends when all the contracted repayments have been made to the finance company. The customer already owns the vehicle. 3.5 Summary This module covered Personal Loans: A personal loan is an unsecured funding facility and can be used for almost any purchase, the amounts being determined by the individual lender depending on the amount of risk they are prepared to take. No deposit is necessary, but a fee may be charged, and the loan agreement can be settled at any time by the customer. The loan is paid over a fixed period of time. The customer immediately becomes the legal owner of the vehicle funded by the loan. June 2014 Page 9 of 9