PEER-TO-PEER car finance has been on the rise in recent years, but in a sector where investors are more used to investing in business or property loans, what can car finance loans do differently?
P2P car finance is a fast-growing market that enables investors to lend money directly to borrowers who would otherwise have to finance their vehicles with cash, a lease or a bank loan.
Leasing, personal contract plans, hire purchase and personal contract hire have become popular ways to purchase vehicles with the vehicle finance market estimated to be worth £27.1bn annually. Last year, the Bank of England said that car finance had grown by 20 per cent each year since 2012.
Although the P2P car finance market is still relatively young, a number of alternative lenders have established themselves to address the growing demand. All three of the “big three” P2P lenders – Zopa, RateSetter and Funding Circle – offer car finance products and Zopa began its expansion in the auto finance space back in February 2017.
Like other forms of P2P lending, P2P car finance works by matching lenders to borrowers. The borrower makes payments on the loan over time, with the lender receiving their original investment back plus interest over the loan term.
Lenders do take the risk that the borrower might not complete repayment of the loan, although the interest on the loan should reflect the borrowers credit history and risk profile. For borrowers, P2P car finance can offer an essential lifeline when traditional lenders are unable to help, although of course all new borrowers will be subject to rigid credit checks.
In the past, the Financial Conduct Authority (FCA) has said that it was monitoring whether firms are lending responsibly and also whether consumers understand the returns and risks involved in lending, and the regulator is believed to be keeping a close eye on the evolution of the P2P car finance market.
In the meantime, lenders can access returns which are broadly in line with the rest of the P2P space, with investors in general earning annualised returns in the range of 3.4 per cent to 6.5 per cent, depending on the risk level of the borrowers.
P2P car finance may be a young industry, but it is growing quickly – and the largest P2P lenders are battling it out for a lead role in the market. In May 2017, RateSetter acquired specialist motor finance providers Vehicle Stocking and Vehicle Credit, and just last week, Zopa said it was preparing to expand its secured car finance product, launching it as a direct offer on its website.
The lender said that around a third of personal loans taken out through its platform have been used to purchase a car.
This suggests that the lender demand is certainly there. If the car finance market grows in line with Bank of England predictions, there will be even more demand for these loans in the coming years.