Louis Rix of Car Finance 247 on how the subprime motor finance landscape has changed over the past seven years.
The last seven years can only be described as a roller coaster. From the ‘boom’ years of 2006-2007 when subprime lending was readily available, to the ‘crash’ mid-2008 which suddenly left us with lots of customers applying for car loans but hardly anywhere to place them, to where we are now: back on track and thriving.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
From 2008 there were hard times all round and, like many companies, we had to re-evaluate our business and internal processes. The end-result now, however, is that we have come out of this stronger and slicker as a company. Not only that, but subprime lending is back – encased in a newer and improved form.
So, how did everything change, both for us and the subprime industry as a whole?
A snapshot of 2007 shows us operating mainly as a subprime broker (not the case today) with a panel of five lenders, including the two largest at the time, Welcome Finance and British Credit Trust (BCT). We were transacting big volumes of business, accepting 55% of all loan applications received online. Both these lenders offered very attractive commission rates, plus large, performance-related bonuses (including hefty payment protection insurance incentives).
There was lots of funding available within the motor finance industry – Welcome were lending hundreds of millions a year, with BCT not too far behind – these were lucrative times.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalData‘Approve everyone!’
One incident that epitomises those times for me, at least, is when Welcome’s internal systems went down for two or three days and we had a backlog of 600 applications waiting for a decision. Our account manager rang to inform us to "approve everyone" without carrying out any credit checks. The industry was out of control.
From the middle to end of 2008 Welcome & BCT withdrew from the marketplace leaving a huge void and only a couple of smaller and arguably astute players still offering finance. The demand was still there, but we were unable to approve our applicants as we had done so before. Our loan acceptance rates dropped to around 15%, our revenues took a severe hit, and we had to make cutbacks within the business in order to survive. We felt we needed to diversify; not only offering car loans but by selling the vehicles themselves to customers.
The smarter lenders came in to their own
Of course, it wasn’t all bad news within the industry – there was a severe lack of credit and near/subprime lenders were needed to fill the void. Some of the smaller lenders within the marketplace who had a tighter set-up were riding out the crash. Once the larger lenders had withdrawn from the market, these smarter lenders thrived. With an influx of proposals, they were in the fantastic position of being able to cherry-pick the deals that were most profitable for them.
It is those lenders who have laid the foundations for the emerging subprime market.
Certainly, in the past 18 months, we have seen an exciting change in the way near/subprime lenders are operating – getting more exploratory and broadening their criteria – while still being sensible in terms of whom they lend to and the amounts they are prepared to advance.
‘Bouncing back’
Around this time last year, we returned back to brokering full-time, having seen how lenders were now operating, as well as understanding this is what our customers truly wanted. We still offer a car-buying service where customers purchase vehicles directly from Car Finance 247; however, the vast majority of our business is now brokered. Now our business consists of 60% near/subprime, and 40% prime lending. While previously we only had a small choice of lenders on our panel, now we have access to more than 10 – and we are actively looking to expand our panel even further so we can offer our customers more choice.
The subprime companies we work with all have a more sensible approach to lending compared to those heady days of seven
years ago:
- more checks are carried out to ensure the applicant’s financial status;
- many of today’s subprime lenders look for applicants who show a marked improvement in their recent credit repayments. This means while they may have had CCJs, etc, in the past, if an applicant’s credit file shows they have been meeting all their credit repayments on time for the past three-to-six months or so, they are more likely to get approved;
- the amounts lent are more realistic and affordable.
Today’s lenders are also much more efficient. Approvals can be instantaneous and loan payout times within a couple of hours maximum in most cases (compared to days in previous years).
And because these lenders are running more profitably and more efficiently, they are attracting outside investment as well as being able to use their own funds.
The car finance marketplace
People will always need cars and most will need at least some help with the financing of them. And more people are searching online for car finance: Google statistics show year-on-year (for July 2013) search terms relating to "car finance" (which will include all types of applicants, those with both good and less-than-perfect credit histories) has increased by 167% using a tablet and 139% using a mobile. This suggests consumer confidence is growing in using online car finance compared to dealer finance and that the market, as a whole, is starting to stabilise.
For us:
- our loan approval rate is back up to 40%;
- in the last year we have seen over 125% growth on the volume of deals completed and by 2014, our aim is to reach 150% growth;
- we have greatly improved our staff training/monitoring and created specialist teams who focus on specific lenders, all which help the customer and lender experience a better service.
Summing it up
Out of every negative experience comes something positive and for Car Finance 247 the last seven years have been a huge learning curve. We have matured and grown, improving our systems and processes in order to support our customers and our lenders better.
We also continue to build on our important relationships with our lenders. Near/subprime lending is definitely back, but this time lenders are offering a more sensible solution for people – that is, sensible lending at sensible rates to sensible people. More finance is available now than it was even as little as two years ago and while the crash was a terrible time, I do believe that, we, as a business, have matured as a result.
Louis Rix is director of Car Finance 247
