UK recession is shifting the goal posts for consumer car finance

Armed with the right motor finance solutions, dealers are well placed to help buyers into their next used car despite the storm of high vehicle prices, rising interest rates and squeezed budgets.

Dealer finance is currently performing well despite high inflation rates as car buyers respond to the cost-of-living crisis by spreading costs with monthly repayments, according to lenders.

However, concerns around consumer affordability are rising and lenders are putting extra onus on dealers to apply robust processes.

According to the monthly Startline Used Car Tracker research, dealers reported 77% of consumers are now buying over a longer period, 30% are reducing lease mileage and 27% are opting for different finance products than they would usually use, with personal contract purchase (PCP) being the biggest winner.

There is some push-and-pull over deposits with 25% saying they are increasing and 30% reducing.

Paul Burgess, chief executive, Startline Motor Finance, says: “This is broadly in line with what we are seeing as a motor finance provider.

“Generally, consumers are concerned about how current economic conditions are affecting them now and could further affect them in the future.

“As a result, they are spending time ensuring that the motor finance solution they arrive at is one that they feel is affordable to them on a month-by-month basis.

“The lengthening of agreements and changes in deposit being seen are very much part of this trend.”

The tracker also found that consumer preferences of finance method have barely changed over the past six months, suggesting car buyers may not be taking into consideration how rising prices will affect their finance needs until they begin their car buying journey, which dealers should take on board.

Debbie McKay, commercial director at MotoNovo Finance, says: “Within what remains a robust used market, dealer finance remains competitive with other unsecured loan options. Still, it is not immune to broader interest-rate rises affecting all lending forms.”

As the economic downturn deepens, affordability has now become an even more crucial component of the lending criteria with lenders urging retailers to scrutinise processes, while a diverse panel of lenders with a range of risk parameters has never been more vital.

ENSURING AFFORDABILITY

Of the majority of business that Alphera writes for used cars, PCP remains the finance product of choice given it offers the certainties of fixed interest rates and guaranteed future minimum value, plus the ability to terminate early.

Alphera head of national sales Kirk Franks urges transparency from retailers and their customers.

He says: “Predicting an individual’s affordability and overall risk profile is becoming much more challenging and uncertain. Who can say with absolute certainty what will happen with inflation and the economy over the next three-tofive years and how household budgets may be impacted?”

Franks needs dealers to provide as much information as possible to ensure customers can meet their financial commitments and understand their resilience to be able to continue to meet their obligations, regardless of the economic climate.

He adds: “But, as we saw with COVID-19, economic downturns can unexpectedly impact people with previously impeccable credit histories. So, it’s an imprecise science and lenders ultimately have to make a judgement on the basis of the information that’s available to them.

“It is a regulatory requirement for automotive intermediaries to gather up-to-date and accurate information from the customer about their current and anticipated outgoings. It’s an essential, foundational piece of ‘Knowing Your Customer’ and ‘Treating Customers Fairly’.

“In the current situation, these checks on affordability and financial robustness have never been so vital in terms of protecting customers’ longer-term interests and ensuring that they have the financial headroom to weather economic headwinds.”

Alphera has worked closely with its partners and the Institute of the Motor Industry to improve professional standards in automotive F&I sales, with processes surrounding affordability being key, including how to handle delicate conversations and discussions around affordability checks and managing customer expectations.

Franks adds: “It’s vital during these uncertain, inflationary times that all parties in this tripartite finance arrangement – retailer/broker, lender and customer – understand the purpose of robust and accurate affordability checks and their value in terms of consumer protection.”

McKay is in agreement. She says: “The strong performance by used car finance, which has increased over the past few months, reflects the demand for used cars and may also reflect a historical trend that has seen unsecured lenders tighten access to credit.

“While dealer finance underwriting has been affected by the rapidly evolving economic impact on people, most notably in ensuring acceptances are affordable, we can provide some valuable options to help dealers support their customers.

“On a broad industry basis, PCPs have become available for older cars, and, where appropriate, lenders can work with dealers to encourage them (car buyers) to consider an alternative, lower cost used car.

“We, and dealers working collaboratively, must ensure that people do not over-commit themselves financially with the outlook for high inflation continuing.”

LENDERS ‘LESS KEEN’

Trends from iVendi’s dataset of more than 450,000 transactions from its platform over the past year found that, compared with 12 months ago, vehicles being financed are 17% more expensive, interest charges are up by 22% and the total amount payable has increased 18%.

Meanwhile, the average term for motor finance applications is 3% longer and contracted mileage is down by 3%.

Darren Sinclair, chief commercial officer at iVendi, says: “There’s some interesting patterns emerging especially around finance rejections. While the percentage of customers being rejected for their first choice lender has barely changed, with a 0.1% increase, second choice rejections have climbed 3.0% and third choice 4.6%.

“What is happening here, almost certainly, is that the cost-of-living crisis and generally poor state of the economy mean that lenders are becoming less keen on approving individuals who do not meet their criteria exactly. This is understandable with a recession looming or already underway.”

Sinclair advises dealers to ensure the business’s lending panel incorporates a ‘good spread’ with ‘a wide range of risk appetites’ as well as competitive rates for consumers.

He adds: “When it comes to dealer finance, we are strongly in favour of multilender customer journeys, both online and in the showroom, as our figures show that the choice and transparency offered tends to lead to higher levels of business for all while meeting consumer needs more exactly.

“However, these offerings do need re-examining when market conditions change and this is probably one of those moments.”

Author: Debbie Kirlew