It is an industry adage in asset finance that leasing’s biggest competitor is a loan from one’s own bank. Is that still the case, or has car finance made the unsecured personal loan redundant? Lorenzo Migliorato assesses the state of play.

As the price range for cars has expanded over the decades – making progressively fewer customers likely to have enough cash in their account to pay up front – carmakers and specialist finance houses have been working to claw customer shares from personal loan providers.

A loan from one’s own bank is probably the first thing that comes to the minds of people looking for a way to finance a car purchase – at least until they are offered other options at the point of sale – and arguably remains the most straightforward route, thanks to the troves of data that a home bank will hold on an existing customer.

“There is clearly little difference between hire purchase and a personal loans, in practical terms, from a customer’s perspective,” says Scott Cargill, chief executive of Admiral Financial Services, the one-year-old lending division of the Cardiff-based insurer.

“Ultimately they are fixed-repayment loans, and by the end of the loan you own the car.” A car loan – effectively a form of personal loan – offers a lower entry point for lenders, to the point that pretty much every highstreet lender offers them, with peer-to-peer platforms like Zuto, Zopa and RateSetter also entering the space.

However, car finance does not necessarily make the personal loan offer redundant: Hitachi Capital and Santander Consumer Finance offer both. Admiral’s choice to include both types of product was made with a specific business rationale at work, explains Cargill.

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“The security that is offered in a hire purchase gives us more confidence to offer it to people that have less-strong credit scores, or are less experienced, where there are really top-grade ownership customers.”

Car finance packages, of course, allow for a more sophisticated offering than basic loans, and Cargill says Admiral is looking into carrelated services and packages to bolt onto PCP and HP products.

Still, personal loans serve their purpose, especially within the prime customer base, and although PCP may be more attractive than a loan to customers looking for flexibility, Cargill says car finance has not been cannibalising loan products.

“The cost of security on hire purchase and PCP, because of things like voluntary termination and manufacturer court disputes, can never get to a point where you can offer 3% APR,” he says, adding: “Personal loans give us an opportunity to serve the prime customer base.”

CREDIT DIFFERENCES

Many brokers and intermediaries will offer loans and car finance side by side: Auto Trader, for instance, was referring customers to Zuto long before it allowed dealers to advertise finance on classifieds last year.

Car Finance Plus is a broker that has been working with providers from the full spectrum of products: its panel lineup includes PCF Bank, Shawbrook, Advantage and Moneybarn, as well as Shawbrook Bank, Progressive Loans and online lenders RateSetter and Lendable. Unlike Admiral, it focuses on bad loan credit.

“In the prime [segment], it is actually very hard for brokers to compete,” says director Roman Danaev. “If you are a prime customer with excellent credit, you go to a high-street bank, or your own bank, and get a personal loan. You have lots of brokers and a lot of lenders operating in subprime, because the APR is high.”

That said, there is only so much personal loans can do. “The problem with personal loans is that unsecured loans are capped at £25,000,” says Danaev. That works for the subprime segment: Danaev says the average amount it brokers is £10,000, with HP accounting for 80% of contracts, personal loans for 5% and guarantor loans for 15%.

In the prime space, however, £25,000 is a tight jacket. Danaev explains: “If you’ve got excellent credit and earn a lot, you would need something more expensive than £25,000,” he says. “With the loans, it is a very thin layer of customers that has good credit and is not looking for an expensive car.”

That was partly the market rationale that led the industry to introduce PCP – so dealers could give the experience of driving a highend car at a total cost equivalent to a personal loan on the same vehicle.

However, Danaev says many customers often misunderstand how PCP works, thinking they are simply getting an extremely good-value HP. “People don’t understand that, at the end of the term, they have to pay up if they want to retain the car,” he says.

“When the term ends, they start looking for loans to finance the balloon payment. It happens quite a lot – I would say daily; and not even a few – a lot of them, actually.”

MARKET CORRECTIONS

Given that high employment and cheap credit greatly benefited the penetration of PCP in the post-recession era, it is worth pondering whether the car finance and loan markets would weather more stressful economic conditions equally well.

Admiral’s Cargill sees underwriting as a more crucial determinant of how a portfolio would fare than product type, noting: “It very much depends on your customer appetite
and your underwriting criteria. As long as you are making the right risk decisions, and understanding the customers well from an affordability perspective, there is not much difference [between loans and finance].”

Still, lenders are well aware of the security element that car finance offers. Despite growing concerns over the country’s household debt bubble, Bank of England (BoE) governor Mark Carney said at the start of this year that he was “comfortable” with lenders’ exposure to motor finance.

“If you [conduct a stress test] and, say, we have a recession and the value of the car is worth 20% less than the residual value that was in the contract, it works out to about six basis points,” he told the UK parliament’s Economic Affairs Committee. Consumer credit, meanwhile, despite accounting for around 8% of banks’ debt exposure, would hit lenders’ balance sheets with a 40% impairment rate in the BoE scenarios, which by Carney’s own admission are quite “brutal”.

For Danaev, a correction in the market – not necessarily one as brutal as in the BoE stress test scenarios – would lead to a rebalancing of product mix, at least on the car finance side of the market.

“If something goes down, people will stop purchasing new, expensive, luxury cars. The upper-middle class, people who earn anything from £40,000 upwards – I would say these customers will stop using PCPs.”

WHAT PLACE FOR BROKERS?

While loan providers still have plenty of opportunity for business next to car finance, brokers like Car Finance Plus might need to do some adjustments as disintermediation puts their role at risk.

Danaev says: “With personal loans, the way the market is going – and it’s going towards automation – it is actually harder to be a broker [for the product].”

Not only is the cost of acquisition drastically lowered by the internet, underwriting is also being made progressively redundant.“Everything is automated, and they would hardly ask you for any proof, because the credit searches, the cross-checks with bank details, it can all be validated pretty much instantly. And if you apply with your home bank, they know you as a customer. You hardly have to do anything to be a broker in the personal loans space.”

Car Finance Plus may currently operate as a broker, but Danaev is not afraid to push the company to reinvent itself so as not to be pushed out of the market. “As a broker, the market will one day realise that you do not need [brokers], because the lenders and the dealers can work directly. What brokers do for the lenders is just that: they provide high volumes of customers,” he notes, adding that for the company, “automation-proofing” will also involve beefing up its existing – but currently small – ownbook loan business.

“You have to look to the future,” Danaev says. “Having a portfolio of loans is something we are looking to do [more] in the future, because being a broker means you are always dependent on the lender – you never know what way the market will go.”