Ian Kerr MBE discusses the possible pitfalls of financing a new motorcycle using PCP
It is unlikely that you get the chance, or the time, to read the motorcycle trade press. However, if you do you probably just skim through, picking out the content that is relevant or interesting to you. In a similar way, the consumer press picks up on some news items that are reported in the mainstream media, but will often play down any bad news that may affect their own sales, as this may result in a loss of readers.
So, it may come as surprise to learn, despite all the glossy adverts and road tests of new Powered Two Wheelers (PTW’s) in motorcycle consumer press, that sales figures for this year are not promising – with April showing an 11.6 per cent decline for motorcycles and a massive 30.2 per cent drop for scooters.
As one might expect, people are looking for a reason to explain this decline; some of which probably include our move to Euro 4 regulatory compliance (which resulted in a lot of cheap deals last year to clear stock, thus pushing up sales figures artificially), the adverse press that scooters are now getting due to their connection with criminal activity and the theft of scooters in general.
On the other hand, the National Motorcycle Dealers Association (NMDA), which represents the PTW dealerships at the sharp end of the fall, has blamed Brexit and election uncertainty for the continuing fall in motorcycle registrations.
No doubt, whatever spin you put on things, it is highly likely that consumers will probably hold off on high-cost purchases in general until things become clearer and confidence returns to the market-place. After all, for most, a PTW is a luxury purchase and not an essential one. And apart from the courier and food delivery industry, PTWs in all their guises are not common in the business world and very rare in the company car market options list. So the trade has to rely on the main-stream consumer!
In reality nobody really knows what the cause of the decline is down to, and I could easily list another few suggestions. But, in order to tackle it the motorcycle trade has responded by following the car industry in tempting consumers to buy ‘something for the weekend’ by taking out a Personal Contract Purchase (PCP) deal.
Simply put, the idea of PCP finance is that instead of having equal monthly payments that are spread over multiple months like hire purchase (HP), PCP financing requires a larger deposit in the beginning and the addition of a balloon payment towards the end. It is basically a leasing plan with low regular payments that in effect pay for the depreciation of the vehicle. But, until the balloon payment is made you do not actually own the motorcycle.
While this may sound good, financial experts are extremely concerned that PCP is most attractive to households which are already struggling to pay their bills. Credit agency Experian categorises such people as being those with ‘stretched finances’. The attraction of PCP for this group is obvious; you get a brand new bike/car that you otherwise would not be able to afford, instead of buying a cheaper second-hand model. But, whether the potential pitfalls of the scheme are properly explained, or the consumer is deaf to the explanation and implications because of the shiny new bike that will soon be theirs, is debatable. The deposit may be affordable, as may the monthly payments – but what of the balloon payment at the end of things?
If the consumer does manage to meet all the repayments, including the final lump sum, then that is all well and good. They will, never-the-less, have still paid more than they needed to because a PCP is effectively a leasing plan. However, If they can’t afford to meet the final lump sum payment and hand the vehicle back, they will then have to find a large deposit to start all over again with another bike, if at all.
It can often be worse than that too! Especially if the consumer exceeds the mileage limitations, the bike is in some way damaged or they try to cancel the contract midway through. Because they then not only lose the bike, but get hit with a financial penalty.
Despite interest rates currently being low they will eventually have to rise, leaving huge numbers of borrowers in trouble as they struggle with higher repayment costs. And you can bet your bottom dollar that a PCP agreement on a bike will be one of the first things to go when it all gets a little too tight – if the finance company doesn’t reclaim it first!
In the car world the credit binge, of which PCP plays a big part, has been the subject of an investigation by the concerned folk at the Financial Conduct Authority. They are seriously worried that it could lead to a situation similar to the USA’s sub-prime property disaster!
For those who may have forgotten, this was due to thousands of mortgages being granted to people who had very little prospect of being able to pay them back.
Harley Davidson, who had sold heavily to the same group, had to shut down its Buell operation to recover losses as thousands of low mileage Harley machines, some less than a year old, then flooded the market having to be sold at rock bottom prices to attract buyers.
In the short term, this may sound an attractive option – lots of cheap motorcycles on offer – but in the longer term there will be no dealers to service the ever more complex bikes or sell the consumables and clothing etc. So everyone will suffer.
So, when you open any consumer motorcycle magazine and you see PCP deals being pushed heavily, remember there is downside. Road tests cite the often high purchase price of the new bikes, but then go on to tell readers how little the monthly costs are when bought on a PCP deal and life all seems good and affordable. But they often do not give the whole picture.
In reality, PCP may not offer long term prospects for the motorcycle trade and ultimately us as the consumer, despite the short term gains in sales. If you encourage somebody to put their neck in a financial noose by taking out loans they cannot afford, it is not just a disaster for them. It affects us all as it puts not only the motorcycle trade at risk, but the entire national economy!