Never has the old finance saying of 'Volume for Vanity, but Profit for Sanity' been more appropriate. Over the past few years, paying for a vehicle by instalments has become increasingly popular and finance houses, keen to win business, have been offering up to six years for a finance deal.
In the days when the used car market held its value, finance deals were very profitable for both dealers and finance houses and were easy to sell in. But as new cars have come down in price, the knock on affect has led to faster depreciation in cars. Car buyers have taken advantage of this by voluntarily terminating their contracts to ensure that they are not in negative equity at the end of these long contract terms.
Forecourts and auction rooms are now filled with ex-finance cars, as finance houses are forced to sell unwanted vehicles quickly, at reduced prices. This has had a major impact on the motor industry. Last year alone, according to the Finance & Leasing Association, £100 million was lost through voluntary terminations of finance agreements.
But it's not just the finance houses that are losing out. The past year has been filled with consumer reports indicating that motorists are being 'fleeced' on forecourt finance deals and buyers are being urged towards personal loans as the cheaper way of financing a car purchase. So although dealers are still selling cars, they are losing their valuable commission on finance deals - an important line of profit at a time when prices are being pushed down.
At the same time, consumers who take out a direct loan will no longer enjoy the benefits of a hire purchase deal, which has the protection of the Consumer Credit Act. And as well as losing out on the savings of a finance deal, they are losing other benefits such as insurance, warranty and GAP.
We should, as an industry, be working together to protect our customer base. For instance, in our experience, the majority of people change their car every 23 months. However, the average length of a finance agreement is 54 months. It would make better sense for finance houses and dealers to offer finance packages at a sensible level to trade value thereby reducing the opportunity for voluntary terminations.
Many motor dealers can offer cheaper finance rates than the direct lenders and they should be highlighting to car buyers the advantages and savings from finance deals and offer a package that is truly tailored to suit the individual customer's needs. This will not only will this ensure a good customer retention rate but an increased bottom line profitability for both finance companies and dealers alike.