Retail car buyers lost the habit of arranging loans in the showroom when they found rates offered by high street banks and internet newcomers more attractive.
Then the rapid growth in internet research added to the problem for specialist lenders and dealers because people found it easy to compare lending rates. Arranging finance before going to a car showroom became popular.
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Over the past few years industry specialists have been hitting back, led by the Finance & Leasing Association (FLA), which provides free tuition on motor finance for showroom staff.
The FLA has been combating the belief of many that dealer finance is more expensive than loans from other providers. Paul Harrison, FLA head of motor finance, said: “POS finance is now highly competitive.”
POS has been consistently taking just over half the market, but there was a setback in the year to September. FLA members’ penetration of sales of new retail cars fell to 47.6%, the first dip below 50% since May 2008.
Harrison blamed the fall on the scrappage scheme. “Without scrappage, FLA members’ market share remains in excess of 50%.” But two other challenges are emerging.
Next year the EU will bring rules on credit trading into line in the UK and Europe and the UK’s Financial Services Authority has already flexed its muscles over PPI (payment protection insurance) premiums. Lenders have been accused of selling these products unfairly.
PPIs at point of sale may be banned which, says the FLA, would be self-defeating.
Forcing lenders to wait a week or a fortnight before buying protection against illness, injury or redundancy would encourage many not to bother, says the FLA.
So what is the future for point-of-sale finance? And can dealers convince car buyers that showrooms are the natural place for them to set up the loans that most need when buying a car?
Executives of companies supplying loans through dealers have been exasperated by the inconsistency of showroom performance. “I have never been able to work out why comparable dealers can do so well or fail so badly when selling finance,” said one.
The FLA’s Specialist Automotive Finance makes dealer staff better equipped to do this through online tuition. And after a slow start it has gathered pace.
New ideas to improve showroom finance sales are being introduced by companies. This month Carlyle Finance launches Virtual Business Manager (VBM), which dealers can have on their websites to help them arrange loans.
Karl Werner, VBM project leader at Carlyle Finance, said: “For many dealerships there is a real role for a business manager, but many showrooms simply cannot justify the investment.
“Many customers browse online whenever they wish to find a car, he said.
“Now they can sort out their finance with a dealer while discovering their car.”
Werner said VBM puts the customer in control so they can discover new financing options for themselves. All the dealership has to do is direct their customers to their website link. “We believe the benefits are significant,” he said.
HPI launched Finance Gateway this year and believes the way ahead is to provide a motor industry equivalent to Confused.com which, through dealers, provides the best finance based on the buyer and the car.
Daniel Burgess, HPI Automotive director, said four finance companies had agreed to partner Finance Gateway and talks with others continued. “At launch we had one person dedicated to the product, but there will be nine by the end of the year ready for Finance Gateway to go national in early 2010.
“We are also exploring how we can make Finance Gateway work for the sub-prime market more effectively. This is a specialist market, but we are in discussions with potential partners to understand these customers and create a viable structure,” he said.
In the year to August, advances on new and used cars in the UK topped £10.5 billion and the scale of the market leads to intense competition among fewer, but larger, finance groups.
Black Horse Finance, part of Lloyds Banking Group, dominates the sector. It grew larger following LBG’s acquisition of HBOS, through which Black Horse absorbed Bank of Scotland Dealer Finance.
Chris Sutton, Black Horse managing director, believes the priority for the remaining players
in the sector has shifted from volume to acceptable returns. “We want to forge sustainable relationships with dealers,” he said.
So does Santander, the powerful Spanish group, which entered the UK market through the acquisition of three British banks and is now aiming to build a stake in the UK motor finance sector.
But the major players and smaller firms such as Southern Finance share a problem – the implementation of Consumer Credit Directive (CCD) regulations, due in place by next June.
BIS (the Department for Business, Innovation and Skills) prepared draft regulations for the UK. These are now with the Parliamentary Counsel whose role is to ensure the Government can properly implement the CCD regulations, with “no unintended regulations”.
They were due to be published this month, but that now appears unlikely. The main issue though for specialist lenders and dealers is to convince more buyers that a showroom is a centre of excellence, where they can feel confidence in the deal on both car and loan.