The warning comes from Black Horse managing director Phil Stones, who believes the industry is “facing a crossroads” over point of sale (POS) finance. Direct lenders, who entered motor finance in the late 1990s, are taking an estimated 9% of the POS market each year, worth several billion pounds.
But Stones says the rates offered by traditional finance companies are just as competitive as the direct lenders. He blames the dealers for excessive mark-ups, which are making rates less competitive.
“If they accepted lower commissions they could be as competitive as the direct lenders,” says Stones. “Dealers need to change the way they treat this element of income and protect it for the future.”
He urges them to adopt a ‘rate for risk’ policy, where the APR is matched to the customer relevant to the risk of either losing them or based on their credit risk.
Finance penetration should be approaching 50% of car sales, but fewer than 10% of dealers enjoy this level of success. Less than 30% are likely to be achieving between 30-40% penetration, with the remaining 60% between 5-30%.
“Dealers need to better qualify their customers – too often they will agree finance terms and the customer goes away and comes back with a better loan from a direct lender,” Stones says. “The best dealers have a business manager – the ones at the bottom take a shotgun approach and don’t tackle each customer individually.”
Under new debit laws, finance companies will charge back the commission to the dealer if the customer cancels the policy during its term. “The emphasis should be on using finance to sell more cars, rather than concentrate on maximising finance from each sale – it’s a tool,” adds Stones. He believes finance revenue can double retailers’ profits at a time when margins are under pressure and new car sales are beginning to stall.
Stones rules out any move to sell direct to the customer, for the moment. “Not at this stage,” he says.