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Motor Finance Market Assessment
Key Note Publications Ltd, January 2000
If they are to survive, car dealers will have to polish up their management of their financial relationship with their customers' and their products.
The motor finance industry will see considerable change in the next 5 years, as a result of the Competition Commission report on car prices and of changes brought about by the introduction of car purchasing to the Internet.
The motor industry is suffering a downturn because of overproduction and competition, as well as problems caused by the overpricing of sterling. The current attack on manufacturers' pricing policies is likely to lead to a fall in sales of new cars, until prices fall further. There will be a knock-on effect, already evident, in the price of used cars, as the supply of nearly-new, pre-registered cars is shaken out into the market.
Dealers will feel the force of falling prices, in their margins, and will need to work together to create better inventories of stock and to arrange for cheaper finance and administrative procedure in order to improve their efficiency. This may be done through closer contacts with manufacturers, although independent dealers will have to set up their own networks.
The introduction of the Internet means that it is easy for customers to buy abroad and import. This has led to a trickle of cars from abroad into the UK, but insufficient to affect the market. More significantly, the Internet has led to car supermarkets and to virtual sales. Websites are now offering a one-stop shop service to customers, from pre-sales to eventual disposal, and dealers will have to change to cope with it.
The motor finance market is dominated by hire purchase (HP) agreements, which are provided by members of the Finance and Leasing Association (FLA), both to new and to used car buyers. There is little sign that HP's share is falling significantly. The development of the leasing product for personal customers, from its successful business introduction, has not proved successful, since takeup has been small. Similarly, deferred payment plans and personal contract purchase (PCP) have not penetrated the market enough to be able to take significant market shares. Since they are all more expensive than a simple cash purchase, there is good reason for customer suspicion.
Consumers are concerned to finance cars that are able to get them from A to B, rather than cars that give them status. Owning a car is important to them, but they want to keep hold of their current car until the time and price are right, rather than replace regularly. They are not enthusiastic about the idea of leasing a car and are, in the main, happy to stay with their current method of finance (that is, for many of them, to pay cash). Hire purchase is a common form of motor finance, but not as frequent a method as a bank loan, which is cheaper and gives the customer immediate ownership. Car buyers are not looking to use PCP, or balloon payment methods, to finance their next car. Dealers are, quite commonly, the sources of car finance, but car manufacturers' own schemes have yet to make a large impression. The sort of people who would borrow to buy a new car are different from those who would buy a nearly new car, or a used car.
It is clear that there are many different sorts of customer and the finance deals that they are offered are not as flexible as the customer. Young adults selecting their first car have different financial problems from a pensioner with no savings and it is tempting to forget about pensioners completely. Our survey found that over a quarter of the population has no car, nor any prospect of owning one.
Among suppliers, we found traditional clearing banks, new financial services providers, manufacturers' inhouse banks, sub-prime lenders and financial aggregators. Each group has its strengths and weaknesses, but the likely trends are pointing in the direction of the aggregators. It is among these that the best loan rates are likely to be found not among sub-prime lenders, serving people on whom county court judgements have already been served, or among traditional suppliers who still have much market share to lose before competing effectively.
For the future, the motor industry and the motor finance industry are both subject to the business cycle, but the population trends indicate a new influx of young drivers to help them. In other words, if they manage to survive a period when margins are pared and when manufacturers involve dealers in elaborate procedures, they meed to capture customers, and capture the public imagination.