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Insight: Consolidation makes mark on car finance

In March, Spanish finance company Santander took its biggest step into the UK market, reaching a preliminary agreement to acquire GE Money Motor Finance and taking its place as one of the UK’s top three lenders.

GE’s departure is the latest in a line of finance companies exiting the motor finance market and leaves just three main players: Bank of Scotland Dealer Finance, Black Horse Motor Finance and Santander, with a plethora of smaller lenders.

The last major lender to leave the market was Abbey National’s First National Motor Finance, which closed in 2003 with the loss of more than 700 jobs.

GE had purchased the rest of First National’s business earlier that year, but its insistence that the motor finance division should be separated was an indication of troubled times for the lender.

Finance companies offer vital services for dealers, not only with consumer credit but for used car stock funding.

But the market is tough, and with increased competition from high street lenders, they have seen reduced margins for motor finance making parent companies assess whether it’s worth retaining.

For dealers, whose profitability is driven by selling additional products around the vehicle, the loss of another finance company means less competition to provide the best loan rates.

Dealers have a two-way relationship with their finance companies, with better rates for stock funding provided in exchange for selling products to consumers.

Though this system rewards loyalty it’s not unusual for dealers to have more than one provider, and negotiate rates between them.

Because of the high value of the loans, better rates can save dealers large amounts of money.

A hike in costs could make point of sale finance less attractive and force larger investment in used car stock.

With the economic outlook already uncertain, neither are desirable outcomes.

According to one industry specialist: “Finance will become more expensive and less profitable in the short term.

We need to make sure we don’t lose more companies.

If another drops out it’s seriously bad news because we will be down to a choice of two. #AM_ART_SPLIT#

“Carlyle and Close are small, creative companies but they can’t pick up from GE.

They’re not big enough to fill the void.

Lenders will be assessing their long term commitment and it’s not inconceivable that another could leave.”

However, previous high level departures have not had a dramatic effect on rates.

The demise of First National led to a short-term improvement in rates, according to Peter Cottle, head of strategic accounts at Bank of Scotland Dealer Finance.

This time there is no sign of an imminent hike in costs. Mike Whittock, acting managing director at Black Horse Motor Finance, says competition is driving rates down: “It’s still hugely competitive because there are still so many providers, so dealers will be offered good competitive rates.

The majority of profit is made by dealers, not lenders.”

But with funds limited, banks and dealers are likely to find margins squeezed.

For both, finance is a key source of income.

But the deals must be targeted at quality consumers and the rates must be competitive.

Graham Filmer, of Rocket Asso-ciates, says: “If consumers are in financial difficulty they will talk to their bank.

Dealers should be in a partnership with their lenders, and talk to them.

If there’s a slow down in finance dealers should be worried, but they can do something about it.”

Consolidation has yet to bring large scale change to the motor industry, but with only three large lenders some fear the departure of the remaining lenders.

Competition is key to driving down prices for finance, and in a period of economic uncertainty where margins are already tight, the loss of another lender could have disastrous consequences for dealers.

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