New research by Trend
Tracker finds that things may be looking up for PoS
Back in 2004, Trend Tracker carried out
its first report into the UK retail car finance market. Half a
decade ago, direct lenders were making inroads into car loans, to
the consternation of dealer point-of-sale (PoS) lenders. But since
then, those direct lenders have led the decline in the car finance
market, and post-credit crunch, PoS lenders have clawed back some
The motor finance sector’s present troubles began
with the crisis in the banking system in 2007, followed by a credit
crunch in 2008, which has resulted in worldwide recession. For the
symbiotic relationship between car purchase and the borrowing
needed to fund much of it, the decline involves a chicken-and-egg
The consequences of the recession for car sales
have been dire. Registrations of new cars to private buyers were
down by 11 percent in 2008 compared with 1999, and down 29 percent
compared with their peak of 1.25 million in 2003.
Sales of used cars have remained more resilient,
falling by an estimated 4.5 percent between 2007 and 2008, and used
car sales in 2008 are estimated to have been 12 percent higher than
the 6.46 million units that changed hands in 1999.
Trend Tracker’s new report estimates that the value
of the retail new and used car finance market, including both PoS
and direct lending, dropped by 50 percent between 2003 and 2008.
The drop was an even greater 58 percent, taking inflation into
Diagnosing the problems
Trend Tracker was engaged by the Finance
& Leasing Association in 2005 to diagnose the reasons for the
decline in the performance of PoS finance.
Some of the strategies adopted by finance
companies since then have won them increased shares, and no doubt
contributed to a relatively gentle rate of decline in PoS finance
market value in the last five years. It fell by only 17 percent,
while the number of new hire purchase and PCP advances brokered by
dealers dropped by 26 percent.
Comparing those figures to the total market’s
decline shows clearly how the scarcity of funds available to direct
lenders since the credit crunch has hit retail car finance.
Of course, in turn, that scarcity of inter-bank
lending has a lot to do with the massive build-up of personal debt
before the US subprime mortgage derivatives market collapsed.
It is less clear quite how serious the problems of
captive PoS finance companies may be. It is the chicken-and-egg
scenario again: some have ailing parent car manufacturers surviving
on bailouts, whose debt is junk-rated, making money market lenders
cautious, expensive or both.
But the dizzying speed at which the manufacture
parents’ car sales have fallen may have spared their finance
subsidiaries the need to ration their scarce resources.
The numbers of competitors to the carmakers’
captive finance brands has also declined over the past decade
reviewed by the report, largely as a result of consolidation. But
the recent absorption of HBOS’ finance business into Lloyds TSB’s
Black Horse may be far from the last event of its kind.
Banks which need to rebuild their balance sheets,
and have been refused the chance to offload their retail loan
exposure to the government, may question the long-term future of
their motor finance subsidiaries, given the likely slow recovery of
car demand and the economy as a whole.
Recovery of the new and used car markets,
particularly retail, clearly depends on the availability of
finance, and, chicken-and-egg style, on the confidence of borrowers
in taking on new debt.
Since unemployment is still rising and expected to
lag behind the eventual re-growth of economic activity from later
this year or 2010, that confidence is likely to remain elusive for
a while yet.
So, too, are wholesale money markets likely to
continue to be challenging for lenders, so long as the full
exposure of the finance system to bad debts remains uncertain.
The report forecasts an increase in the volume of
retail car finance of 38 percent over the next five years. This
means that even by 2014 the market will remain well short of its
size in 2003, and more like that of 2006/07, when the UK retail new
car market was already past its 2003 peak.
The most immediate prospect of re-growth
for UK motor finance lenders will be the government’s £2,000
scrappage incentive scheme.
Half-funded by participating carmakers,
it is budgeted to produce 150,000 extra new car sales in this
fiscal year, and most of those extra buyers will need finance.
However, since it is dealers who will take in their old cars for
scrapping and who will dispense the incentive in the form of
discounts, only PoS lenders are likely to reap this windfall.
A longer-term factor that may constrain the pace of
re-growth for PoS and direct lenders alike is the continuing
decline in the number of outlets where finance can be sold.
In 2008, there were 30,510 physical outlets in the
UK from which motor finance products could be sold, 15 percent
fewer than the 35,845 present in 1999. Bank branches account for
the largest proportion of these outlets – 34 percent – with 10,400
outlets, followed by 9,120 new and used car dealers.
The effect of a sustained slump in UK car sales
this year is likely to be a steeper fall in PoS finance
Readers’ special offer
Readers of Motor Finance can benefit from
a saving of £200 on The UK Retail Car Finance Market 2009’s
published price of £1,450 plus VAT on orders placed up to 17 June
2009. See the brochure in this issue.
For more details about the report, a
contents list and list of tables/charts, go to http://www.trendtracker.co.uk/.