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Finance market declines in buzzing new car market

The fortunes of the UK’s retail finance market is at odds to the growing new car market.

While vehicle registrations have grown by 32% over the past 10 years, with record sales in recent years fuelled by low interest rates and lower car prices, the retail finance market for new and used cars has declined by 5% since 1999, from 2.18m transactions then to an estimated 2.06m for this year, says the latest, 2004 edition of market analyst MFBI’s ‘The Retail Car Finance Market in the UK’.

However, it says, the value of the retail finance market has continued to grow over the past five years, by 15% in absolute terms from £15.05bn in 1999 to a current £17.38bn, though in real terms after inflation, market value growth has been a much lower 3%. What growth the motor finance sector has enjoyed has been due to an increase in the average value of new and used car advances from £6,915 in 1999 to £8,435 in 2004.

The average value of new car loan advances has risen 13% from £8,685 five years ago to an estimated current £9,780 today, while the increasing popularity of younger cars in the used market has driven up average used car advances faster, by 21% from £6,170 to £7,475 over the same period. Nevertheless, it is the used car market which has done most to reduce the overall value of the retail car finance market in recent years, having declined by 27% in volume and 12% in value overall, despite the increase in average loan values.

Although the past five years have seen new entrants among direct lenders increase the choice of loans available to car buyers, including supermarkets, utility companies, it is the point-of-sale (POS) sector that has witnessed the fastest growth in car finance sales, increasing the value of their market share (now 78%) by 21% since 1999 to £13.49bn.

MFBI estimates independent lenders’ combined 2004 car finance share to be approximately 22%, worth £3.89bn.

Most of the growth of the POS car finance sector is attributable to carmakers’ use of their captive finance operations to offer low or 0% interest deals to new car buyers, and the declining role of independent finance houses in new car finance has forced consolidation in the supply side of the market. The three biggest, bank-owned independent finance houses – Black Horse Motor Finance, Capital Bank and GE Capital Woodchester – now account for about 45% of the POS retail car finance market.

These companies and their smaller competitors have faced a continuing fall in the number of outlets available to them. Including the 10,500 high street outlets owned by banks and the 5,900 franchised dealer outlets now in operation, and used car dealers, there are currently around 31,590 physical outlets where personal or hire purchase loans are available – 12% fewer than in 1999.

That declining trend in outlet numbers may accelerate if the take-up of internet loan application facilities increases from a current 21% of all personal loan sourcing.

MFBI forecasts that the retail car finance market will decline over the next five years (along with declining new car sales) from 2.06m advances this year to 1.75m in 2009. The value of the market will fall by 3% from this year’s £17.38bn to £16.89bn, despite a forecast 14% increase in average combined new and used car loan advance values from this year’s £8,435 to £9,650 in 2009.

Point-of-sale and direct lenders’ combined finance penetration of car sales is forecast to drop from a current 74% to 68% in 2009, and the lenders’ penetration of the used car market, already accounting for no more than 14% of purchases, will fall to 12%, as interest rates rise, consumer expenditure falls, and lenders - especially in the mortgage market - face an increased risk of arrears and defaults.

As base rates rise over the coming five years, and direct lenders’ APRs rise with them, discounted finance deals from POS providers could come to compete successfully with personal loans, if POS providers are able to use the retention of their title to cars financed to keep arrears under tighter control.

MFBI suggests that while the use of extended loan terms could buoy up flagging car sales volumes, their medium-term effect in extending replacement cycles could have the reverse effect on the car market.

  • The data referred to is part of MFBI’s 2004 edition of The Retail Car Finance Car Market in the UK, published this month at £750.00.

    For more information on this report, email Robert Macnab at or telephone 0870 421 4356

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