NEW CAR SALES may be slowing down a little, while environmental concerns over pollution and CO2 emissions are rising, but the UK remains a country demonstrably in love with its motors.
Just look at the numbers – there are no fewer than 37 million vehicles on our roads, 31 million of them cars, with 2.6 million new cars registered last year alone. Registrations have dropped 6.3 per cent year on year in the first six months of 2018, but that is in the context of a historic peak – the end of a four-year period in which over 2.5 million new cars were registered annually, the highest number ever recorded.
What’s been driving those booming car sales? In a word, finance.
The rise of low-cost personal loans and finance products like hire purchase (HP), personal contract purchase (PCP) and personal contract hire has made it easier than ever to get a shiny new car for an affordable monthly payment.
The car finance market is now worth a whopping £27.1bn annually, of which £18.4bn is down to consumers financing private car sales. 80 per cent of those personal car loans are funded through so-called PCP finance deals, with the rest mostly via HP.
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Those figures only account for secured lending in the new car market – add in the 8.1 million used car sales every year and the unsecured personal loans which are used to buy many of them and the size of the market increases again.
No wonder that the potential of car finance is being eagerly explored by a number of peer-to-peer consumer lenders.
“It’s a substantial opportunity,” says Lloyd Collett, senior manager, motor finance, at RateSetter. The number three P2P lender set up its dedicated motor finance division a little over three-and-a-half years ago, he adds.
“It’s a big piece of the business and has become a core proposition. Our online customer journey makes the process pretty seamless, and for our investors it means we have a diversified loan book.”
RateSetter deals largely in unsecured loans for used cars sourced via brokers, and targets customers who are outside the scope of existing car finance providers – a parent buying a first car for their son or daughter, for example.
“They are not going to buy a new car, or even a five-year-old one,” Collett explains. “They will probably get an older car with a fair few miles on it – the kinds of car you typically have to pay cash for.”
The average loan size is comparable with the rest of their portfolio at around £5,500 and because it is unsecured the underwriting is all done with the standard credit checking systems already in place. It also appeals to used car dealers, says Collett.
By offering RateSetter loans on older cars taken in part exchange, they can sell cars for a better price, rather than sending them to auction where returns are generally lower. The business is now looking at getting into the lucrative secured finance market for used cars, too.
“We have just ventured into that market, it’s a dealer-led product that is not readily available to brokers,” adds Collett.
The object of the exercise, he says, is to gain experience of the asset class. “We are looking at how the loan book matures over time. The biggest opportunity is in creating a seamless customer journey. Dealers and brokers both want to deal with the finance provider which offers the easiest pay-out for the customer. That gives us an edge.”
In many ways, the car finance market does look like it is ripe for disruption from faster, cheaper and quicker providers. In much the same way that consumers used to get personal loans almost exclusively from their bank, the majority of car finance – new and used – is still point of sale, i.e. offered by the dealership where the car is bought and provided by car manufacturers, finance houses and specialist brokers.
And there is no intrinsic reason why P2P lenders cannot get in on the action, according to Neil Faulkner of P2P analysis firm 4th Way.
“It looks like a fairly safe new product line and I think it is very likely that some of the platforms will make a success of it,” he comments.
“They have muscled in on unsecured and small- and medium-sized enterprise loans, so why not car finance?”
But unlike those other markets, there are plenty of rivals, says Adrian Dally, head of motor finance for trade body the Finance and Leasing Association.
“There is no lack of competition in the market, rather the opposite,” he explains. “There are at least three new players in the last three years who have established themselves quickly on the basis of offering a new proposition.”
Nor are the incumbents unaware of the challenge posed by new entrants to the market or the importance of a slick customer experience.
“As a group we are investing heavily in digital,” says Lauren Pamma, head of commercial management for Black Horse, one of the UK’s largest car finance providers with a network of over 5,000 dealers serving 200,000 customers a year.
“Later this year we will be piloting a new dealer point of sale system and we are doing a huge amount of work to improve the customer experience.”
And while car buyers typically now do more research online before they decide what car to buy, Pamma says that the dealer is still a vital link in the chain.
“Our most recent survey showed that 45 per cent of people still want face-to-face guidance from dealers when buying a car, and that 80 per cent said they would be unlikely to buy a car without having test driven it first,” she adds.
Thus, the classic P2P sales routes – direct to consumer and via aggregator sites – have to be complemented by a route to market that also takes in car dealerships, says Andrew Lawson, chief product officer at P2P consumer lender Zopa.
But the opportunity is there for the right product, he adds. “The number of target customers in our market who are using secured car finance is huge,” Lawson says.
“Usually from dealers at present, and what we see is that pricing is high and flat across the board. For a secured loan it should be cheaper. That means that our lower-risk target customers are being over-priced.”
So Zopa – a third of whose customers already use their loans to buy a car – is also trialling a secured HP car finance product. Launched in December via a small number of “hand-picked introducers”, it is aimed at the used car market and is being funded for the time being not by P2P investor money but using the firm’s own balance sheet.
The key novel risk in car finance as far as P2P lenders are concerned is the valuation of the asset. Offering HP rather than PCP keeps that risk as low as possible – with HP the lender only has to value the car once, when the borrower buys it, whereas with a PCP deal the estimated future value of the car when the deal ends – known as the guaranteed future value – must also be taken into account.
Zopa’s aim is to bring all the things that customers like about its personal loans already – speed, simplicity and certainty on rates – to secured car finance. And to use its superior tech to deliver a more tailored result – something that incumbents cannot match, says Lawson.
“It’s a question of having the tech that can do better pricing for individual risk and provide the 21st century customer experience that people have come to expect,” he explains.
But P2P lenders aren’t the only eager newcomers with the car finance market in their sights.
“The existing used car finance industry is struggling to make the advances seen in other online retail markets,” asserts Jonny Clayton, founder of Oodle Car Finance, a start-up which has attracted backing of over £160m from the likes of KKR and Citigroup.
“The customer journey is decades old… For example, you can’t even search for a car based on an individual’s personalised monthly cost.”
Oodle is a platform which allows buyers to search for both cars and finance at the same time, providing personalised finance quotes and doing it all in a much more customer-focussed way than is currently possible, says Clayton.
“What does the customer want? To find out the best car they can afford on their monthly budget,” he explains.
In a world where there are comparison sites for everything from plane tickets to holidays and insurance, it should be easier to make informed choices about car finance, adds Clayton.
“Navigating the used car market is a minefield – there is a real opportunity to create a trusted retail brand,” he says.
“We’ve had 300 per cent growth this year – the limiting factor isn’t product or sales but hiring good talented people who are aligned with the business.”
There is plenty to play for in the car finance market, but there are also plenty of players, both old and new, grappling for the ball. How much of a share the P2P sector can carve out for itself, and which platforms will be the most successful, only time will tell.