The motor finance sector across the Atlantic reflects many of the UK’s concerns in some respects, while being markedly different in others. Chris Farnell speaks to key figures to find out more about the road ahead.

There are a projected 281.3 million registered vehicles in the US, making it one of the largest car markets in the world.

The way this market is financed has come under inspection lately, following a story in The Wall Street Journal that revealed that roughly a third of auto loans for new vehicles taken out during the first six months of 2019 had terms of longer than six years – data it sourced from credit-reporting firm Experian. These figures look extreme compared to the 10% figure seen in the market 10 years ago. The longer payment terms may be linked to the increase the size of loans over the last decade, by around a third, with Experian saying the average auto loan now comes to $32,119 for a new car.

“It seems likely that term length of loans will go longer. Sixty-nine months is the average today, but the share of the market with 84-month terms continues to grow,” explains Charlie Chesbrough, senior economist at Cox Automotive.

“Canada has many 84-month term loans, and the US market is likely to follow as well. It is one method to keep monthly payments affordable, and given the improved quality of vehicles, it is not as risky as it might have been just 10 years ago.”

Aside from these numbers, however, the car finance market in the US simply works in a very different way from the UK’s – primarily as a result of a fundamental difference in the relationship between the dealer, the customer looking to buy a car, and the financier.

Mike Kane, vice-president of dealer financial services for Ally Car Finance, explains: “What makes the auto finance industry unique in the US is that the vast majority of automobile finance transactions originate at the dealership.”

New vehicle and later-model-year vehicle financing occurs in an indirect environment where every dealership is licensed uniquely as a financier. The dealership essentially creates an instalment sales transaction. The retailer offers the consumer finance to pay for the product, with the dealer as the first party. In this environment, financiers become third-party lenders.

“We bid on the transactions, generally coming in after the deal is closed with the consumer and purchase those contracts from the dealer,” Kane says. “In a lot of the world, you get an automobile loan arranged between the lender and the consumer, but in the US that is not the case. There’s a legal, structural difference in the contracts themselves and the laws that govern it.”

Zo Rahim, manager of economics and industry insights at Cox Automotive, also points to the complex relationship between lenders, customers and dealers in the US as a unique challenge.

“The US auto finance business is interesting, given the nature of participants in the space,” Rahim notes. “From direct to indirect lending, the ability for both dealers and consumers to manage the vehicle finance process means lenders have to ensure that their products and services are received well in the market, since the overall market is fragmented.”

Regulatory Environments

Of course, one subject that lenders in the UK and US car finance markets both enjoy complaining about is the regulatory environment, although businesses in each country face very different challenges.

“Regulations affecting the sector are a common theme. We complain about it, I’m sure like my counterparts in the UK do, but it’s been a relatively highly regulated sector for a long time – 20-40 years,” Kane says.

“It ramped up considerably post 2009; however, I would say that it is a way of doing business that is part of our process, and we adapt to it. It’s always there and it’s never going to go away.”

The key difference between the regulatory environments in the UK and US is that the US has more of them.

“There is a slight difference that I would point to in that the nature of the dealer business, which is the driver in the US, means every state has unique motor vehicle finance laws,” Kane points out. “There are 50 unique states, as well as one overarching federal set of rules.”

Car Loans of America CEO Daniel Joelson agrees, adding:“When it comes to paying cash for vehicles, rules are similar across national borders. However, when loans and financing are involved, things change dramatically by region. Different loans have different features, so it’s critical that car-buying lessees get to know these terms very well ahead of signing. The biggest difference between American and international car finance is the extent of law enforcement and judicial pressure.”

While this can be complicated from an administrative point of view, it is not viewed as a serious challenge for the industry.

Kane explains: “If you only provided loans to the state of Texas, you only have to worry about state rules. If you operate over multiple states, you have to work by the state laws for each state, as well as the federal laws. But regulation is the third or fourth priority in terms of what we’re thinking about.”

Indeed, Joelson believes the sector could actually benefit from more regulation. He tells Motor Finance: “There is definitely a lack of regulation affecting the US car finance sector. Used cars aren’t much of a bargain anymore. The average consumer, according to Experian, takes out a loan to get behind a used steering wheel.

“The loans that are taken out for a used car equal more than $20,000 on average. The average car buyer is paying more month to month for their vehicle than ever before, adjusted for inflation.”

Technological Revolution

Another thing the US and UK markets have in common is the increasing role technology has to play in motor finance from a number of perspectives. With the unique dealer-lender relationship that exists in the US, the rise of online shopping is bringing every part of the market closer together.

“Digital retailing solutions are enabling consumers to almost purchase a vehicle from the comfort of their homes, leading to new and innovative platforms that will result in much quicker financing options for consumers,” Rahim says.

“This is a huge win for consumers looking to save time. Though automotive finance and automotive retail have historically been two crucial pillars of the automotive industry in the US, they are quickly forming to be one strong foundation tied together by technology.”

Kane agrees, adding: “Technology in our sector is continuing to evolve rapidly, whether on the shopping side of the business or the financing side. We’re making sure our infrastructure and technology investments stay up to date.

“Then there’s an offshoot of the digital environmental we’re operating in now, which is fraud – identity fraud, consumer fraud, we have to have all the right controls in place to measure that.”

Joelson also points to new technologies that will help simplify and streamline the car financing process on a number of levels. “With the development of blockchain technology, transferring car titles and many of the paperwork and processes that lead to purchasing a car will be optimised,” he says. “This should simplify each and every step of the car-buying process for new and used vehicles. Spending less time per transaction will free up car dealers to improve the ways they do customer service.”

Kane expects that over the next five to 10 years, the finance sector is going to evolve its capabilities and offerings to the dealer, and like Joelson, he believes that streamlining and simplifying transactions is going to be a major area for development.

“We’re enabling technology to shorten the cycle and make it easier and more convenient to do a transaction; that’s where a lot of the effort is coming from. We’re taking any friction points out of the end-to-end process,” he says.

The other area where technology is going to be an important tool is, of course, data. “We see technology providing an approach that’s more data driven and empirical, to shorten and improve the customer experience,” explains Kane.

A Car to Own

One area where technology has had a significant effect in the UK has been in the relationship that consumers have with car ownership. The rise in apps, telematics and new finance products means outright ownership of a car is being pushed to one side in favour of PCP and leasing agreements – or in some urban areas, forgoing car ownership entirely in favour of services such as Uber.

It is a trend that Joelson has noticed in the US. “Transportation services such as Lyft and Uber have introduced new, low-cost alternatives to owning, leasing or renting a car,” he says.

However, fundamental differences in the shape and, of course, sheer size of the US market mean others are confident that car ownership will remain a fixture of the market for the foreseeable future.

“It’s a topic, but not a concern,” Kane says. “To give you some numbers, we routinely see there’s 25% normalised penetration of leasing in the industry. It has lifted as high as 30-35%. Today we’re in a cycle where the margins are tightening on manufacturers and OEMs, and leasing is an OEM-driven product not generally offered by banks in an open market. There’s enough market scale and size in the US that it doesn’t concern many lenders.”

While shared vehicle propositions are starting to become more visible in larger urban centres, Kane tells Motor Finance that in most of the US it is simply not feasible.
“Private ownership is still a priority for people to get back and forth to work and transport their families,” he says.

Managing Risk

While the technology is changing, many of the challenges facing the market still remain the same: essentially, the task facing lenders is to find customers who will pay back their loans, and to maintain a healthy market.

“A big part of what we do here is we are credit risk managers,” Kane says. “We are really focused right now on the overall economic environment, making sure we know what the US and the broad macroeconomic environment look like. Economic health is key to managing the credit risk function.”

“The biggest challenge is the availability of credit,” Rahim adds. “As long as consumers are able to finance their vehicles, the industry should perform well. It is when credit dries up for the consumer that it impacts the broader sector.

“A lender and dealer can only do so much to grow business, but if consumers can no longer get affordable financing options to purchase a new or used vehicle, the industry weakens.”

As with the UK, auto lenders, and indeed, lenders across the board in the US have spent a lot of the last 10 years recovering from the economic crash of 2008.

“In our sector, we’ve gone through nearly 10 years of positive strong growth or a very solid economic environment, and the lending environment has been healthy,” Kane says. “From a forward-looking perspective, we’re trying to understand how long that will last watching the global macroeconomic situation. We’re seeing if there’s a slowdown in the future and how to manage that. It doesn’t have us panicked, because the environment is very good.”

Chesbrough says the 2008 crash actually made the car finance sector a more appealing prospect for investors.

“Lower delinquency rates after the Great Recession compared to other loan types have made vehicle financing market an attractive investment opportunity for lenders,” he says. “Credit unions entered the auto finance arena aggressively, although they are focused on higher Fico credit loans.”

Moving forward, the important thing is going to be monitoring and controlling potential risks.

“Risk management is key,” Rahim explains. “Lenders can keep providing financing options to consumers as long as they lend to a balanced group of individuals and not skew to subprime or risky borrowers to hunt for yield. When automotive retail volume is coming down, better to keep providing financing to a broad spectrum of borrowers and not just risky borrowers.

“When one skews high to subprime and things in the market get rough, lenders typically pull back on financing which causes a ripple effect softening the overall automotive retail market.”

The challenges are real, but Rahim is optimistic. He concludes: “The future should bring quicker, efficient results for financing for consumers,” he says.

“The key is to reduce friction when financing a vehicle, and I think as an industry we are on the right path.”