The rapidly growing motor finance market has attracted a number of new players into it over the past year or so. While it may seem like relatively easy money, the sheer number of players in the market means that a company needs to find an angle to distinguish itself.
This is what Peter Parsons did in October 2011 when he formed Credit 4 Cars.
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In the words of John Webster, group director of Credit 4 Car’s parent company One Stop Car Credit: "He saw an opportunity in the non-conforming used car market."
And so Credit 4 Cars was created to lend in the subprime space, alongside sister company Credit Car Sales, a retailer aimed at people with poor credit.
The idea was the two would support one another and grow hand in hand. However , Credit 4 Cars received a shot in the arm at the start of January 2013, when it received a substantial funding line from an unnamed source. Since then, Credit 4 Cars has grown by a factor of 20.
In comparison, Webster says Credit Car Sales is in a steady state. Although the two companies are related, Credit 4 Cars regards Credit Car Sales as just another dealership when it comes to lending.
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By GlobalDataWebster says: "The link between the two is what got the business model off the ground. But the growth in the business comes from what we’re doing with independent dealers."
Funding line
The company has recently agreed a second line of funding, which should take it forward for the next year-to-18-months, along with an equity investor buying a small shareholding which Webster says put a "substantial value on the business".
As with Provident’s acquisition of Moneybarn in 2014, the new funding line shows there’s external confidence in the subprime market.
Webster shares this confidence, and says based on the demand he’s seeing and the new funding line the company has received, the
company is considering new options.
One such option is potentially to start lending higher up the credit scale. He says: "Based on our experience in the deeper subprime marketplace, we have an opportunity to look up the scales a little bit. We’ve started at the hard end of the market, so to speak, and we’ve got all the experience under our belts. So maybe we could move up the scale a little bit in terms of lighter adverse products.
"We’ve not make a decision about this yet, but I wouldn’t rule out the fact that we might bring out a new product which takes us just north of the scale a little bit. As far as I’m concerned I don’t want to rule anything out."
One potential spanner in the works for the subprime lender is the Financial Conduct Authority. Credit 4 Cars is currently working with an interim licence, and at the time of writing is yet to reach its landing slot. The fact that Credit 4 Cars operates in the deep end of the credit market is both a blessing and a curse in this regard for Webster.
On the one hand he notes: "The FCA has got a fairly broad interpretation of what it calls a ‘vulnerable customer’. I think they’ll believe people who have a poor credit history probably fall under the heading of vulnerable customers.
He continues: "So the radar of the FCA falls upon you more quickly because you are dealing with customers they might consider vulnerable."
But on the other hand, as Credit 4 Cars has a history of dealing with customers who have had financial difficulties, Webster suggests the company was already going out of its way to demonstrate the customer was in a position to afford a loan.
He says: "We get at least two months of bank statements and literally go through them line by line, identifying income and cross-matching these with what the customer has told us.
"In a nutshell what we do is calculate their regular monthly incomes and outgoings, add on what the payment is going to be on the finance agreement and add on a bit on top to give them some wriggle room. And then provided the applicant has got the surplus after we’ve added all the plusses and minuses, then on the face of it the customer can afford the vehicle and we’ll approve it."
According to Webster, this process can be done on the same day, but can take longer if all the required information is not handed over, or if there are inconsistencies with what is presented.
One thing notably absent from this process is the use of credit scoring, which Webster says is for a reason: "Credit scoring is a very blunt instrument in my opinion. It reflects the past rather than the present. So you would find, for those lenders who tend to use credit scoring, there would be a lot of customers who fail the credit score despite the fact the score doesn’t reflect where they are today, as opposed to before."
Thanks to this system, Webster is confident Credit 4 Cars will achieve full FCA authorisation when the time comes and continue to grow at a sustainable rate. He says: "We are thinking very hard about how to present the case to the FCA and the business plan. It’s all there; it’s just a case of getting it all down on paper in the right order that they’d find acceptable."
