UK Car Lending

Maintaining the Competitiveness of Auto Finance in the Face of Rising BoE Interest Rates

Car dealers are facing a double whammy: rising overheads and shrinking consumer finances after the Bank of England (BoE) raised interest rates again this month to 1%.

Fears have been expressed that the bank’s interventions in 2022 will put even greater pressure on struggling households as inflation, which soared 7% on the year to March, and energy bills continue to soar.

These pressures on the pocket will likely result in a sharp decline in consumer spending as tax increases and inflation begin to eat away at wages.

At the same time, dealers are dealing with rising energy bills and global supply chain disruption, exacerbated by the conflict in Ukraine.

Finance companies also raised interest rates, with new deals attracting higher annual percentage rates (APRs) due to market expectations.

Worse still, when new cars have been ordered but financing has not been locked in, the buyer is potentially exposed to further APR hikes, driven by the possibility of additional BoE interventions.

So what can dealerships do to ensure they remain competitive, especially when consumers can shop so easily online for their vehicles and finances?

Richard Bartlett-Rawlings, partner and automotive manufacturing specialist at RSM UK, says rising interest rates will affect some dealerships more than others.

He believes that while franchise dealers may receive support from manufacturers to ensure their sales continue to consume supply or maintain rotation of used inventory, non-franchise dealers may need to look more broadly to s ensure that their financial partner remains competitive with more traditional lenders. .

“One way to ensure competitiveness is to work with finance providers that specialize in the automotive industry and can effectively model residual value,” says Bartlett Rawlings. “This has a significant impact on costs to the end consumer and, therefore, the ability to sell shares.”

Evolution Funding Sales Director Keith Bell has a different view. He believes that rising interest rates will not change the dealership’s underlying competitiveness because, eventually, all lenders will have to adjust their rates to match the costs of the fund increases.

On the contrary, says Bell, dealerships lose their competitiveness by using the wrong pricing format.

“The best way for a dealership to be confident in their competitiveness without reducing their revenue potential is to use a true credit-based pricing product,” he says.

“It’s the only way to ensure that a dealership’s customers get the APR they deserve and expect, and they shouldn’t kid themselves, because their top-rated customers already know what they can get elsewhere before they’ve even had a chance to quote them.

“I always tell dealerships that if their used car acceptance rate is 50%, then the 50% they’re missing aren’t the mid to low score customers – the ones who don’t take financing are high-scoring customers who all knew they could get a better APR elsewhere.

Online financing can also affect traditional conversations about vehicle pricing, with consumer rebates being more difficult to obtain as dealers aim for maximum margin.

“Today’s market for cars – new or used – will see little to no haggling over price,” says Bartlett-Rawlings. “Demand remains strong and as a result there is currently little customer power in the market.

“New car financing attracts significant contributions from manufacturers, which can reduce the overall cost of financing the vehicle and make switching to a new car attractive.

“Changes made by the Financial Conduct Authority (FCA) to the fee models for car finance products have resulted in a move towards flat rate financing which will normally be more expensive than variable risk based financing, where the Rate is based on individual customer’s credit risk.

“This could pose a problem for those who offer fixed interest rates, as it could make them more attractive to those with lower credit ratings who cannot obtain better rates through a credit risk model. variable.”

As lead times for new cars continue to increase to months between ordering, building and delivery, finance companies need to hedge against further interest rate hikes that could impact the agreement.

But it also requires carefully coordinating any price changes with their brokers.

Bell says that as a broker, his company must follow the policies of individual lenders.

But, he adds, because of the size of his relationships with major lenders, he tends to be sufficiently informed of any future price changes.

“It’s because they understand that we have to coordinate pricing between multiple lenders, and that can’t be done in a matter of weeks,” Bell says.

“It helps us carefully manage the pipeline and we also have the flexibility to transfer the deal to an alternate lender to retain the original customer’s APR if we really need it.”

Partner and Automotive Manufacturing Specialist at RSM UK Richard Bartlett-RawlingsBartlett-Rawlings adds that, with lead times remaining long, added to the current disruption to the global supply chain, manufacturers have pulled build slots, leaving them unable to commit to new vehicle delivery times.

The current economic climate, he says, will also impact the competitiveness of traditional lenders and alternative providers against captive finance companies, which may offer more attractive interest rates and provider contributions to offset increases. wider market interest rates.

“If rates rise significantly, to offset inflationary economic pressures, that will most likely push more volumes into captive finance companies,” Bartlett-Rawlings says.

“This will be further exacerbated by the cost of living crisis, which will result in variable rate products offering higher rates to consumers due to the ripple effect on affordability and personal credit scores. .

“It is likely that we will start to see finance companies refrain from setting order-date rates and offer completion-only rates, forcing consumers to take the rate offered at the delivery or to withdraw from sale completely because it is no longer affordable. .

This too will be impacted by the cost of living crisis, as monthly payments that would have been comfortable at the time of ordering may no longer be affordable at the point of sale.

Author: Alex Wright