More P2P platforms should look at car finance, writes Michael Lloyd…
Car finance is an area relatively untapped by peer-to-peer lending platforms, with one exception. Consumer lender Zopa is the only P2P car finance provider in the UK, specifically offering car loans, as well as a personalised car hire purchase (HP) product.
Some platforms – for example, Lending Works and Elfin Market – offer consumer loans which can be used to purchase cars. And RateSetter provides asset-backed finance for dealerships to stock up on cars, funded by its investors. Following its acquisition by Metro Bank, RateSetter’s unsecured personal loans – which can be used to buy cars – will be funded by the challenger bank rather than its P2P investors.
But Zopa is still the only P2P lending platform offering a specific car finance product. Buying a car with car finance is pretty similar to purchasing a house, in the sense that there is a valuation and the consumer works with a broker to find the best deal. But it gets more complicated when it comes to personalising specific products.
A standard car loan is where the provider lends enough money to make up the shortfall between the car’s price and valuation, so that the borrower can buy it outright. The borrower will then repay the lender in monthly instalments over an agreed period, adding pre-agreed interest. HP is where the borrower makes monthly payments to a car finance company to hire the car and will only own it after the final payment.
Meanwhile, personal contract purchase (PCP) products have lower monthly repayments because the consumer is only paying a portion of the car’s value. At the end of the contract, the borrower can pay a final balloon payment of what the car is worth to keep it, or they can keep the car by continuing to hire it back as it depreciates in value, or return it and take out a new arrangement on a fresh car.
“Going back 30 years, people owned cars from day one by paying with cash or a personal loan,” said Adrian Dally, head of motor finance at the Finance & Leasing Association (FLA). “HP came out after that and was the most popular [option]. It reduced the risk and interest rate, which is very attractive to buyers. “Then PCP took over and is currently the most popular, having been so for the past 10 years.” But with only one platform offering a specific car finance product, the P2P sector appears to be missing a trick.
Tim Waterman, chief commercial officer at Zopa, says the platform entered the car finance market after noticing that traditional car financing options were slow to adapt to consumer needs. “With unsecured car loans being one of the key reasons customers came to Zopa, we identified a great opportunity to provide a better service to customers and greater access to alternative financing products via online channels,” he says.
“In fact, our most recent research even highlights that people in the UK are becoming more open to shopping around for their own car finance deals, with 60 per cent saying searching online for car finance is their preferred option.”
Zopa’s research suggests that car finance is a niche that deserves a closer look. And it appears that some P2P platforms are starting to realise the opportunities in the car finance market.
William Rist, head of partnerships at Lending Works, says that the consumer P2P lender will conduct its own research and development (R&D) on the market, before considering whether to launch into this space. “It is a market that is interesting to us,” he says. “When we look to go into a new market, we conduct extensive R&D to make an informed decision about if we think it is a market we can do well in or not. This is something we will do in due course for car finance, however there is no date for that piece of work to kick off yet.”
With lots of P2P business and property lending and still relatively little personal lending in the P2P space, car finance is one of the few holes remaining in the industry. Neil Faulkner, managing director of P2P analysis firm 4th Way, expects this to change due to the “attractive economics” of this lending segment.
“It surprises me that no P2P lending company in the UK has taken on the niche of car finance as its main focus and there is certainly a lot more space for car loans,” he says.
“I hope that P2P lenders are giving car finance some serious thought. Borrowers need it and investors could always benefit from even more lending diversification.
“Based on the attractive economics of vehicle financing, I would expect that both P2P consumer lending and P2P business lending platforms would consider tapping into this space.”
There are plenty of reasons as to why platforms, especially those offering personal loans, may want to consider car finance.
4th Way’s pre-Covid data on P2P car finance showed losses before interest of four per cent over the full life of any loans, which are easily covered by less than one year’s interest, while average lending rates are seven per cent per year. “Bearing in mind the ease with which lenders can theoretically spread across a large number of car loans, the risk-reward basis for this kind of lending makes it a good way to diversify,” Faulkner says.
“Recoveries of car finance bad debt in the P2P lending industry have not been impressive, suggesting that, if more specialist expertise was brought in, losses would come down further.”
Another allure of the car finance market is its significant growth in recent months.
During the March 2020 lockdown, the car finance market all but disappeared, with dealerships closed and consumers purchasing cars via click and collect orders. But since then there has been an uptake in car sales, and thus car finance. In September 2020, according to FLA figures, the market reported annual growth in new business volumes of seven per cent compared with the same month in 2019.
Meanwhile, the risks of the pandemic have led to more people seeking to buy second-hand cars as a safer alternative to public transport. “In light of Covid-19, more people are switching from public transport to getting back on the road as a safer way of travelling,” says Callum Walsh, managing director of car finance broker Match Me Car Finance.
“I feel whilst Covid-19 has had a financial impact on the economy and people’s personal circumstances, there will always be a need for car finance and that need can only get stronger as a result.”
Platforms can enter this space relatively easily by undercutting the current deals while still offering competitive car loans to borrowers, and charging enough interest and fees to cover risks. However, the market is not very competitive on fees, and new rules from the Financial Conduct Authority will be implemented in January 2021 to ban discretionary commission models that some car retailers and motor finance brokers use.
Zac Choudhri, who launched car finance broker Prime Personal Finance in January this year, says his firm charges less than the main dealers, at about seven to nine per cent. “The lowest the main dealers go to is about 9.9 per cent, while that’s the highest we charge,” he says. “It hasn’t been very competitive for us offering lower rates.”
Affordability and creditworthiness are key factors that lenders look at when assessing borrowers, and the pandemic has led to lending being tightened across the board. Choudhri says it’s much more difficult for anyone with a thin credit file or people who are self-employed to obtain PCP car finance now.
“If you’re a prime customer with a great credit score and history it’s very easy to get car finance and you can be approved on the day, maybe even within 15, 20 minutes,” he says. “But for those with a thin credit file or who are self-employed, it depends how the provider responds. “Even if they are working throughout the lockdown and the current climate, providers think these borrowers may not be able to sustain payments in the future.”
With car finance providers tightening their belts, now could be a great time for P2P platforms to enter this space. If they partner with an open banking provider, it could be even easier. Credit reference agency Credit Kudos is working with several lenders and brokers in the car finance market to provide up-to-date open banking insights to help them better measure a borrower’s creditworthiness.
This helps customers access more financing options faster, especially supporting those traditionally underserved such as the self-employed. Waterman says Zopa helps borrowers access car finance by offering secured and unsecured car finance loans as separate products, with both options funded by its P2P investors and its bank.
“For our HP offering, we carry out all background checks on the car, process all online paperwork and contact dealerships directly about the money,” he explains.
“Offering both unsecured personal loans and HP makes it easy for people to pick the finance option that works best for them.”
Nick Harding, chief executive of Lending Works, believes that personal loans for car purchases do have their place. “PCP requires a vehicle worth a certain amount in certain conditions,” he comments. “Borrowers might use a personal loan to make up the balance to buy an older car they can’t get a lease for.
“But if a borrower is unable to get car finance, they are unlikely to get a personal loan to purchase the car. Car finance typically has more flexible credit risk appetite, with the security in the vehicles, whereas unsecured loans have tighter credit.”
While Harding is interested in the opportunities presented by car finance, other P2P consumer lenders such as Elfin Market have told Peer2Peer Finance News that they are not considering making any inroads into the space. With more people getting back on the road in the pandemic era, car finance is set to continue to grow, so this is an untapped opportunity for the P2P sector. As the market grows, perhaps more platforms will follow Zopa’s lead and realise the car finance space is worth a closer look.