How COVID-19 has affected dealer finance
Over the last few months we’ve received lots of questions from retailers on our bi-weekly webinars on the topic of finance and how COVID-19 has impacted it. So, on our most recent webinar we invited Motor Finance Development Director, Fiona Mackay onto the panel for a dedicated ‘ask the expert’ feature on finance.
The car finance market started to recover in June 2020 shortly after car dealerships were allowed to reopen with used cars first out the blocks, however both new and used car finance figures were up YoY during July / August in volume and value terms. The percentage of private new car sales financed by Finance & Leasing Association members in the 12 months to August 2020 was 93.5% suggesting finance remains the key facilitator in new car purchase.
When we look at the type of finance products available, we’ve seen very little change of products chosen by customers pre vs post lockdown. On new cars, PCP remains the most popular finance product accounting for 71% of finance volumes in August. There has been a very small migration from PCP to leasing on new cars but nothing too significant. On used cars, HP is still the dominant finance product accounting for just over half of used cars financed at 56%, however, there continues to be some migration to PCP, a trend which has been in the market in recent years with PCP accounting for 40% post lockdown compared to 38% in 2019.
Onto consumer behaviour on our own platform, we’ve seen an increase of around 23% (September vs February 2020) in the number of consumers choosing to search by monthly price for their next vehicle.
And consumers aren’t just searching by monthly price; they’re also engaging with finance calculators on Auto Trader with an average of over 17,000 car finance interactions per day and both new and used finance enquiries up significantly since January.
If we look deeper into these interactions, we can see that there has been little movement in mileage and APR however, we’ve seen a slight change in the number of consumers selecting a higher monthly price in both PCP and HP deals with an increase of around £20 - £25 per month. And surprisingly, we’ve seen very little change in the length of terms or the annual mileage.
Thinking ahead to the next six months, as New Car supply starts to return, we should see a solid new car finance performance for Q4 but performance will very much depend on lockdown status due to COVID-19 and tariffs in Q1.
For used cars, demand still remains high, supply is still a little constrained so we may see demand softening slightly but should still be positive with finance following the metal.
Overall, our prediction is that finance should continue to be a strong facilitator for the sale of the car in the next six months for both new and used.
To hear the full webinar conversation, you can watch on demand here.
Webinar Q&A
Q: In your opinion, is dealer finance competitive enough? In your opinion, what should retailers do to improve used car finance?
A: As both new and used car finance volumes are up c. 5% YoY in July and August, at face value that would suggest that finance offers are competitive. On new cars, many brands continue to promote a combination of 0% finance or low rate finance with a finance deposit contribution which is driving strong finance penetration. On used cars, we have seen a slight decrease in the average APR configured by consumers on our platform since lockdown and many brands have heavily promoted their Approved Used car finance offers with either low rate finance or value added products too which has aided competitivity. That said, finance rates promoted on used cars continue to be higher than those seen on new so there may still be further opportunity.
Q: Any thoughts on motorcycle finance and whether it is different from car finance. In particular we are seeing a lot of poor credit people trying to get into the delivery market but can't afford a decent bike. Where can we point them?
A: We are seeing some interesting differences in what’s happening in the purchase funnel of bikes & cars/vans though even the broad trends are similar. Since lockdown bikes have the highest conversion from sessions on our platform to finance applications which means there is strong demand and great engagement on our platform for bikes.
However, looking at our partner finance metrics, bikes also have a lower finance approval and activation rate than cars and vans suggesting that although demand for bikes is up, more people were declined for credit for bikes.
There are a number of lenders that will fund motorcycles, varying from prime through to subprime and there has also been quite a variance in the approach to lending criteria taken by near and sub prime lenders following the first lockdown so it may be worth investigating alternative funders or speaking to those who specialise in sub prime lending for bikes.
Q: In your opinion, what should retailers do to improve used car finance?
A: There’s lots of things retailers can do in this area in addition to doing the basics well:
Visibility of offers - Make sure you’re promoting your finance offers everywhere that customers are searching with clear and transparent information and calls to action.
Good speed of response - Digital finance enquiries are coming in thick and fast and can be varied in terms of data from a partial application to full proposal and these need to be handled promptly in the way consumers expect.
Automation - Use automation within the finance process to improve the quality of the service you provide to your consumers. For example, we see great examples where a consumer applies for finance at 10pm and within one minute a credit search has been run, eligibility has been confirmed for the retailer’s funder panel, the consumer has been placed and approved with a funder and an SMS and email has been sent to the consumer confirming they have been approved for finance on their desired vehicle and asking when they would like to pop in to the showroom. Automating these processes not only provides a quality service to the consumer but also frees up your time to perform other value added tasks.
Move credit eligibility up the funnel - Getting a good understanding of where your consumers fit in your lender panel can also save time and improve conversion. Some retailers utilise eligibility tools but they are often used after a quote has been given to the consumer and often after offer/order. Some lenders have or will move to a rate for risk model and it will be extremely important to understand the profile of consumer you are working with in order to provide a tailored journey and give them rates which are realistic to their circumstances. Moving eligibility further up the funnel can also save time as knowing a consumer does not fit with certain funders on your lending panel enables you to have that conversation earlier in the process.
POS process - Some retailers have a great process for the sales aspect of the customer journey but when a consumer is a finance customer post order this often this reverts to lenders systems and re-keying of information. Re-keying of information creates errors, no matter how good your teams are. Using a finance and insurance software platform such as AutoConvert which provides ‘the pipes’ between retailers and lenders enables retailers to send proposals to their full lender panel from one platform which cuts out re-keying of information and errors associated with this. Incorporating compliance routines into this process can also save further re-keying of information and ensure that compliance is followed for every consumer interaction.
Q: The mention of shift from PCP to PCH for new cars was mentioned by Fiona. Do we expect this to continue? How do we expect the mix of these products to change in the future?
A: There has been a trend of marginal movement from PCP to PCH over recent years – from 11.4% in 2017 to 12.5% in 2019 before COVID-19 and this trend seems to be continuing this year with 12.7% choosing PCH in 2020 as a whole and 13.7% choosing this product post lockdown. Various parties have suggested that leasing and / or subscription models will grow over the next few years – for example, McKinsey & Company is forecasting a 4% per annum increase in leasing until 2025. Whether these forecasts are correct remains to be seen but PCP will still remain the most popular finance product on new private cars so giving consumers maximum choice with clear explanations of the benefits of each product so they can choose the most appropriate one for them will be important.
Q: With the increase of vehicle sales in Q3 have dealers experienced that same growth in finance penetration levels, a static growth, or a decrease given the government support around bounce back loans and CIBLS especially in the LCV market? Our own finance penetration has remained static when compared to Q3 2019 but our finance income was up 20% over the same period this year.
A: The vast majority of dealers (63%) responded that they had seen the same number of finance deals coming through since lockdown in our recent survey. However, both new and used car finance figures were up YoY during July / August in volume and value terms. The percentage of private new car sales financed by Finance & Leasing Association members in the 12 months to August 2020 was 93.5% suggesting finance remains the key facilitator in new car purchase.
With respect to consumer behaviour on our own platform, we’ve seen an increase of around 23% (September vs February 2020) in the number of consumers choosing to search by monthly price for their next vehicle
And consumers aren’t just searching by monthly price; they’re also engaging with finance calculators on Auto Trader with an average of over 17,000 car finance interactions per day and both new and used finance enquiries up significantly since January.