Recent articles in the press have targeted car finance as the next potential economic timebomb. This may be the latest scaremongering from the papers, but affordability is key when lending in any environment, writes Shaun Armstrong, managing director at car finance provider Creditplus
Creditplus takes affordability and consumer confidence very seriously. It is at the heart of everything we do, and has helped us become one of the leading car finance providers in the UK.
A fundamental principle of car finance is how it allows consumers to spread the cost of a vehicle across the length of the agreement. By breaking the total cost down into monthly payments, it allows consumers to purchase a car that may be out of their price range if they had no choice but to save up a lump sum to buy the car.
This allows a consumer to purchase a better-quality car. This means that the consumer can choose a vehicle with better safety equipment, more economical engines, and better reliability. If forced to purchase a car with just their savings, the consumer could end up spending more on repairs and maintenance costs.
This does not mean that we at Creditplus do not conduct as many checks as we can when consumers apply for finance with us. It is in our best interest to ensure that our customers can afford the agreements they take out with us, not just financially but for our reputation. With tighter controls and much-improved consumer protection from the FCA, affordability is key when lending in any environment. We help over 80,000 applicants each year source the right car loan subject to their specific circumstances and a crucial part of that is affordability.
The car loans industry has for several years now seen the majority of lenders’ loan books perform well, with reduced bad debt or payment performance from consumers. Interest rates have been at their lowest now for many years. Brexit, however, may change this with some increases to interest rates.
Creditplus was the first online car finance provider to conduct a soft credit search, allowing consumers to apply without affecting their credit rating. We also created a variety of online tools to allow consumers to get an idea of what their finance could cost before they even apply.
Ethical lending is a key component of our business ethos. We want consumers to feel confident that they are dealing with a provider they can trust. This is evidenced in the large number of repeat customers we have, and also the FCA authorisation we have been granted.
One target of the recent press reports has been personal contract purchase (PCP), mainly because it is ideal for purchasing newer cars.
PCP is a popular product because of the lower monthly payments and the three different options you have at the end of the agreement. It is also generally only available to those who have a good or excellent credit rating. This means that the consumers who qualify for PCP have a record of making payments on time, not getting into any difficulties, and generally managing their credit well.
PCP is an ideal funding product, allowing a fixed-cost, fixed-term agreement, regulated to give consumers a sound product.
Its popularity initially spread from dealers offering manufacturer finance programmes, where it could be argued the residual values set at the back end of the agreement were strong to support the vehicle being purchased.
Direct lenders, however, all set a residual value based on CAP or Glass’s guides at 10% below the future anticipated sales price of the vehicle at the end of the agreement. This helps make the finance programme more realistic and, if a guaranteed future value is offered as the residual value, the consumer has options rather than concerns at the end of their agreement.
It is important, though, to remember that each lender has their own excess mileage and dehire damages policy, so a consumer should make sure they are aware of the returning conditions of the car at the end of the agreement.
All finance products come with an element of risk. Personal circumstances change and that can affect a consumer’s ability to pay for their finance agreement; there is no controlling that. What we can control is the checks carried out at the start of the agreement, the way information is presented to our customers, and how we treat our customers throughout the process.
We have confidence that we provide our customers with all the information they need to make the right decision for them. That way they can get a better-quality car at a price they can afford with a finance provider they can trust.