Written by Arvid Linde, Creditplus
Creditplus takes a look at the popularity of motor financing in the UK, the USA and Australia, comparing annual percentage rates and recent trends.
UNITED KINGDOM
When discussing spending trends of the last few decades, Great Britain has often being described as a ‘country of borrowers‘ and certainly the way in which Brits finance their car purchases would bare testament to that.
Of the 2,044,609 new cars sold in the UK in 2012, a whopping 71.2% of those were purchased using motor finance, compared with 63.5% in 2011 according to figures from the Finance & Leasing Association (FLA). A total of 1.91m new and used cars were purchased using motor finance in the UK in 2012, seeing a 14% rise on a total of 1.67m in 2011. In monetary terms, their borrowing for car purchasing equates to around £2.2bn a year spent on new cars.
In 2012, there was 36% increase in the value of consumer new car finance provided through dealerships in 2012. The number of new cars financed in this way increased by nearly 140,000, or 27% compared with the previous year.
Spokesperson for the Finance and Leasing Association – Helen Saxon – comments,
“In the mid-1990s car finance was very popular but when the recession hit, that popularity took a steep dive. But since about 2007 the amount of people buying cars on finance has only risen. Two to three years ago it was about 45%. But at the end of July 2012, nearly 68% of new cars bought by consumers were purchased using car finance sold in dealerships.“
The most popular form of car credit is a Personal Contract Purchase or PCP*, which equated for 61% of all new car finance agreements opened in 2012. A PCP enables customers to pay a certain amount (usually on a monthly basis) for a set contract period, which is typically between 24 and 48 months. This is similar to Hire Purchase, in that it enables the customer to return the vehicle at the end of the country, without any further liability, but differs as it gives them the right to ultimately acquire the vehicle for a previously agreed cost. A PCP is a conditional sale agreement and therefore under UK law the purchaser is protected under the Consumer Credit Act 1974 and the Financial Services Regulations 2004.
The growth of the PCP market is quite incredible, given that as recently as 2006, it equated for 38% of car finance contracts in the UK, while 56% of motoring credit was on a Hire Purchase basis. Now it commands a 61% market share, while Hire Purchase makes up just 26% and other types of leasing 8%.
The main difference between leasing and Hire Purchase is the ownership of the vehicle. If someone leases a vehicle, the ownership of that vehicle remains with the leasing company. However, with Hire Purchase the ownership of the vehicle will be with the buyer.
Leasing is growing in popularity due to the lower monthly costs. Unlike Hire Purchase, if the person using the car wants to purchase the vehicle they will have to pay a balloon payment, with Hire Purchase after the last payment is settled, the owner does not have to make a balloon payment.
Competitive financing deals have arisen because lending against a fixed asset such as a car is more attractive than unsecured loans. Online car finance providers have reported major increases in year-on-year business (some in excess of 100% year-on-year rises) as consumers look to take advantage of typically low annual percentage rates (APR) of interest and the convenience of comparing quotes online.
A quick browse of the internet throws up rates as low as 4.9% with Creditplus, one of the UK’s leading car finance provider, with typical representative rates of APR around the 5.7% mark. In the UK, probably more than in other regions, it’s the credit rating that largely affects the rates a customer can get. The above illustration would only be available to a person with a squeaky-clean credit history. Too many missed payments or bad debt on the record and a customer is suddenly looking at 24% or even more.
UNITED STATES
Across the Atlantic, we see a similar picture with auto financing which is an increasingly popular way to finance car purchases in the United States. Average rates of APR for auto loans are low – the latest figures revealing average APR on a 60 month loan for a new car is 3.76% and for a 36 month used car is 4.50%. According to Bankrate auto loan comparison, the lowest rates found online currently is U.S. Bank with 2.80% over 48 months and Chase Bank with 2.98% for the same period of contract. There are even better deals to be had, however, many auto loan offers below the 2.5% rate come with a catch – either a memebership or a high arrangement fee is required.
Greg McBride, senior financial analyst at Bankrate.com, who regularly survey car loan rate figures being offered by banks and credit unions across the USA, commented;
“We’ve never seen rates this low… We’re in a prolonged low-rate environment, and I don’t think they’ve bottomed yet.”
There were over 14.5m car sales in the USA in 2012, with 59% of all new and second purchases completed with auto financing. This is a major contributing factor in the 13% increase of car sales in 2012 compared to 2011 and the best sales figures since 2007. A rise is being forecast for 2013 also.
As more car finance is sold, so more market trends are emerging. Some lenders are offering new car loans that go beyond five years – 72-months and 84-month car loans. The most extreme case seen recently – a 97-month auto loan. There is a good reason for this trend – the average new car price has hiked during the last couple of years while the salaries have seen very little in the way of increase. Nevertheless, the average monthly repayment on auto loan keeps decreasing. Looks like increasing the length of the finance agreement is the only viable way of getting people into new cars.
This trend is enabling consumers with lower credit scores to qualify for more expensive and luxury cars they might have been able to afford previously as they spread to cost over a longer term. Indeed, some purchasers are taking credit on a seven year repayment basis in the USA currently.
Director of automotive credit for Experian – Melinda Zabritski – says
“A lot of it is an effort to make some expensive vehicles a little more affordable on a month-to-month basis.“
AUSTRALIA
Growth in both car sales and auto finance is also a theme in Australia. A record number of new vehicles were purchased in 2012, with 1.1m units snapped up on the forecourts. The 10.3% rise on sales was fuelled by big jumps in the purchases of sports-utilities (called ‘utes’ by the locals) and commercial vehicles.
Dorian Lanthorpe, director of the Motor Industry Services at Deloitte commented on the current vibrancy of the Australian car market that –
“It (car sales) passed a million units, and it’s only done that five times in history, and the five of those were in the last six years.“
More recent figures, revealed by Deloitte in March show that sales for cars in the first two months of 2013 were up 8.1% compared to the same period in 2012, pointing to another records sale year in 2013.
The car finance market is a vibrant one, with more purchasers of new vehicles agreeing to purchase contracts. Australian loan comparison site Canstar quotes average car loans rates ranging from 7.99% and 10.75% currently. Interest rates for new car loans are typically 2% or more higher than mortgage interest rates in Australia and this fact is supported by the current average standard variable mortgage rate in the country standing at 6.19%.
While the loan APR rates do seem more expensive than those in the UK or USA, it should be pointed out that many manufacturers including Holden, Ford, Nissan, Toyota and Kia typically offer 0% to 1.9% rates of APR on car finance deals that stretch over a short time period (usually 48 months).
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NOTE: ** PCP can be thought of as a “rent-to-buy” agreement or a lease with a balloon payment purchase option agreed to at initial signing.
About the Author
Arvid Linde is a journalist of Estonian descent, with an MSc in Engineering and Logistics. Electric cars and other means of alternative transportation are his favourite subjects. Having successfully completed his Masters project on Electric Car Economy, and following extensive research in the field, he is now editing an independent green motoring blog at electriccarnews.co.uk.
