Research shows dearth of direct loans hitting car sales
The latest report from the automotive research specialist Trend Tracker shows just how hard the financing of car purchases has been hit by the credit crunch.
Trend Tracker’s analysts estimate that the total UK retail car finance market, including dealer point of sale (POS) and direct lending, halved in value between 2003 and 2008 to a total of £22.8 billion. Taking inflation into account, the fall has been an even steeper 58%.
In terms of the volume of finance agreements in this same period, dealer POS finance sales declined by 26%, but the direct car finance market - comprising unsecured and secured personal loans – witnessed a massive 60% fall. This discrepancy shows how the dearth of credit available from direct lenders has been a major cause of the decline in the UK’s new and used car markets. Registrations of new cars to private buyers fell by 15% in 2008 compared to 2007, and dropped by almost one-third from their peak of 1.25m in 2003.
Problems for car finance suppliers
The publication of Trend Tracker’s report coincides with the demise of the former Capital Bank, now Bank of Scotland Dealer Finance, to be consolidated into Black Horse. But even before the present financial crisis, the number of independent finance companies operating in the UK motor finance market had been declining with mergers and acquisitions over the past decade. The weakness of the finance houses’ bank parents’ balance sheets and the scarcity of long-term funds in the money markets now raises questions over the viability of some finance companies. Trend Tracker believes the need for banks to strengthen their balance sheets and profits could see some of the major banks seeking to dispose of their automotive finance subsidiaries as non-core assets.
Some carmakers’ captive finance companies also need government help to access money market resources, but have so far been denied it. And the faster the carmakers’ vehicle sales fall, the harder they and their finance subsidiaries will find it to borrow. Limited lending capacity may lead to a loss of captives’ market share to independent finance houses.
Renewed confidence key to recovery
Recovery of the new and used car markets, particularly retail, clearly depends on the availability of finance and the willingness of consumers to borrow. Trend Tracker’s analysts estimate that the total number of loans and finance transactions for both new and used retail car purchasing fell by 52% between 2003 and 2008. And although their forecast for the next five years is for an increase of 38%, this still falls well short of 2003 levels and represents a market volume similar to 2006/07.
The record low Bank of England base rate has given consumers with variable rate mortgages - half of all mortgaged households - a significant increase in disposable income. If this contributes to a recovery in consumer confidence, demand for new and used cars – and car finance - may pick up, although fears of job losses will continue to limit the desire to take on new debt.
Trend Tracker forecasts that the retail car finance market will show re-growth over the coming five years, but to a value still lower than that of 2005. Recalling past lessons, if the decline of the early 1990s recession were applied to 2007 new car sales, this year’s registrations would tumble to 1.66m, and new car – and finance – demand could take as long as 12 years to recover.
Finance distribution channels set to shrink further
In 2008, there were 30,510 physical outlets in the UK from which car finance could be sold, 15% fewer than a decade earlier. Banks account for the largest proportion of these, at 34% with 10,400 outlets, followed by the 9,120 new and used dealers which account almost exclusively for the sale of POS hire purchase and PCP car finance.
The longer term trend in the distribution structure for motor finance is for the number of outlets available to decline. In the last five years 19% of franchised dealer sites closed down and in the next five years Trend Tracker forecasts that another 21% will go.