The car finance industry may well be in its most innovative phase ever. Over the past decade, it has completely revolutionised the way we buy cars and what we can afford. In a long string of creative new products, Pay As You Go Car finance is only the latest. Does it hold up to the early praise bestowed upon it?

Learning from Insurance

Pay As You Go may be a new term. But it is not strictly speaking a new technology. Insurance companies have been using it for quite some time to great effect. We even blogged about telematics car insurance a while back. Recently, however, it has also become popular as a car finance instrument.

Pay As You Go Car relies on a small black box fitted into the front of your car. This box is capable of following where and when you drive. The idea was for insurance companies to monitor the driving behaviour of their clients and to make sure they were following the rules stipulated in their contract. Young, inexperienced drivers, for example, may not have been allowed to drive at night and the black box was able to track their compliance.

With a little twist, the very same device can now be made to work for the finance industry as well.

How does Pay As You Go Car finance work?

The black box, as redesigned for Pay As You Go Car finance looks identical to the one employed by insurance companies. It works a little differently however.

Rather than monitoring your driving behaviour, it merely enforces your monthly payment plan. At the end of the month, you pay your loan rate. In return, you’ll receive a code. By entering it into the black box, you gain the right to continue driving the car for another month.

If, however, you fail to make that payment, you won’t get another activation code. As a result, the black box will warn you and eventually deactivate the car. Then, you won’t be able to drive unless you make that payment and get a new code.

Who is it for?

Pay As You Go Car finance was designed for anyone with a bad credit rating. Very often, these people were unable to secure any kind of car loan. Banks and dealers simply considered the risk of a default too high.

Thanks to the black box, you can now get a car loan even if your credit score is very low. The device renders the car useless unless you can keep the payments up. So there’s a very strong incentive to keep paying. This, in turn, makes lenders more willing to accept an application.

According to one of the companies pioneering the technology, compliance rates have risen by a staggering 500%!

PAYGC finance typically works only in combination with a regular Hire Purchase car loan. This means that the finance company owns the car until you have made the last payment. Once you reach that point, the vehicle is finally yours and the black box will be removed.

What about the concerns waged against Pay As You Go Car?

Ever since the black box started making its appearance in cars across the UK, it has been criticised and demonised.

Since the device comes equipped with a GPS sensor, privacy issues were a first concern. These are, however, not particularly relevant for the finance aspect of the tool. Lenders have no interest whatsoever where you’re driving. This is purely of interest to insurance companies (if at all).

More troubling is the idea that you could be stranded in the middle of nowhere after your car shuts down due to a failed payment.

How realistic is this happening?

Not particularly. Finance companies are aware of this potential problem, of course. They stand nothing to gain from the car ending up in a bad neighbourhood or somewhere in the open, where it can get stolen or broken into.

So, every black box will definitely warn you well ahead of time that another payment is due. This eliminates the danger of you forgetting to make the payment. And there is always a grace period, which allows you to at least return the car home and make sure it’s parked safely.

Sometimes, this grace period will only be a few days. Sometimes, it may be as much as an entire month. Either way, you will be able to rectify the situation. As soon as you do make that payment, you can continue to use the car.

Still, isn’t this a bit harsh?

You could, of course, argue that it’s a bit harsh to block you from driving this way. But finance companies will always take action if you fail to pay your loan obligations. Pay as You Go Car seems a lot less severe than sending a collecting agency round to visit.

In fact, some have argued that the black box device can be a healthy way of organising your finances. Writes online finance platform Disease Called Debt:

“When money is tight, it makes financial sense to pay priority bills first, such as the mortgage or rent and utilities (after all, you can get your electricity supply cut off pretty quickly should you fail to pay). The payment box technology could effectively move car finance bills up the priority list of which bills need to be paid first – this is a good thing (…) as long as a choice doesn’t have to be made between paying car finance or electricity for example.”

This reasoning makes a lot of sense. If you really need the car, you should be able to make the payments required to use it. Black box car finance acts as a reminder of that.

The benefits of Pay as You Go Car finance

On the other hand, a black box installed in your vehicle can have quite a few obvious benefits. We already mentioned that it allows you to get car finance even with bad credit. On top of that, the following advantages apply:

• It is one of the simplest finance options at your disposal. You simply pay and enter the code to keep driving. And if you can’t make the payment, you wait until you can.
• Contract negotiations are a lot easier as well. Black box car finance does not require complex credit checks, as the device actively encourages and supports compliance. The risk of a default is a lot lower.
• In the long run, black box car finance can lead to fairer finance deals. If compliance really does rise as much as advertised, the risk of a default is brought down considerably. In return, interest rates should drop as well, making this technology a win win for both sides.

In one of its most innovative phases, the car finance industry may well have struck gold with black box car finance. It will be intriguing to see if the technology really does turn into another revolution – or if it will remain a niche.