Dealer finance could benefit from an increase in demand as rising base rates make it the most convenient option for buying a car, according to Sword Apak.
The software provider pointed out how rising Bank of England (BoE) rates – which were notched up twice since November and now stand at 0.75% – would push up cost for forms of financing such as unsecured personal loans. This, in turn, would make point-of-sale car finance a more attractive option for prospective buyers.
“The recent increase in the UK base rate will impact motor retailing with its inevitable knock-on effect on loan rates, underwriting and the cost of wholesale stocking,” Sword Apak executive vice president James Powell said.
“A potential ‘silver lining’ to this is that tighter underwriting is more likely to impact personal loans than secured loans, which could make dealer finance a more attractive option for consumers.”
He added that traditionally, unsecured lending was more heavily hit by rising rates than secured finance, and pointed to how car finance saw a shift in demand in 2009, as banks reined in riskier lending in the aftermath of the crisis.
“Our analysis suggests that for many, credit will be harder to come by and more expensive; with unsecured borrowing facing a bigger impact,” Powell said.
“Acceptance levels for dealer finance on an ‘across-the-board’ basis have always been higher than for personal loans, and whilst not immune from higher costs and tighter underwriting, this could become of increasing value to dealers, especially in used car sales where dealer finance penetration is lower than for new car finance.
“It could benefit dealers and finance companies to make the availability of dealer finance more apparent to consumers.”
Powell words echoed a Moody’s note in May saying that car finance and associated financial instruments – like asset-backed securities – would be shielded from a rate rise, thanks to the prevalence of fixed-rate agreements.