car finance executive summary

Car Finance Executive Summary – UK – January 2012

1

Car Finance

Executive Summary – UK – January 2012

Sarah Hitchcock

Senior Financial Services Analyst

The car finance market is performing

reasonably well given the slowdown in the

economy and in the volume of new car

registrations. The market should continue to

grow over the next few years, albeit at a very

steady rate. There are some uncertainties

attached to this. Much will depend on the

economic situation. If the recovery stalls and

conditions significantly deteriorate because of

the eurozone debt crisis, the market could

again contract.

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Car Finance


Sales volumes are growing steadily, and this trend

should continue

Total volume sales of car finance plans sold via dealers

increased slightly, by 1%, in 2011 to 1.14 million, while

the value of advances was up by 2% to £12.5 billion.

This was a fair performance in the context of flat new

private-car sales and a difficult economic backdrop.

Moreover, sales data suggest that a growing

proportion of new car buyers are using dealer finance

to fund their purchase, partly due to the increased

competitiveness of these plans and partly due to the

contraction in supply of alternative funding solutions,

notably unsecured loans.

Used car sector continues to perform well

The used car sector is larger than the new car sector,

in volume terms, and has performed better over

recent years. Volume sales of used car finance were up

by 4% in 2010 and are estimated to have grown by the

same margin in 2011.

In contrast, the volume of new car finance plans is

estimated to have fallen by 3% in 2011, following a

strong performance in 2010. The decline suggests that

more people are opting for a used or nearly new

vehicle rather than a brand new one.

Performance of related products

Many areas of the consumer credit market have

experienced a drop in new business lending since

2008. Gross lending on unsecured loans fell by an

estimated 6% in 2010 to £23.5 billion, and is expected

to have reached a similar level in 2011. However, the

credit card sector appears to be bucking this overall

trend, with gross lending having risen by 7% in 2010 to

£131 billion. Mintel expects gross credit card lending

to have grown by a further 6% in 2011.

FIGURE 1: FORECAST OF THE CAR FINANCE MARKET, BY VOLUME SALES – FAN CHART, 2006-16

SOURCE: FLA/MINTEL

The Market

(m)1.14

Best case (m)1.61

Worst case (m)1.06

Mintel forecast (m)1.33

0.0

0.5

1.0

1.5

2.0

2.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mark

et

vo

lum

e (

m)

95%

Confidence intervals

90%

70%

50%

Actual Forecast

Est.

0

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Car Finance


Market Factors

The retail car industry

Both new and used car sales declined over the 2004-

08 period; since then, sales volumes have stabilised.

Industry data suggest that there were around 1.9

million new cars sold to consumers and business users

in 2011 (down slightly from 2 million in 2010) and 6.8

million used cars sold (the same as in 2010).

There are around 31 million cars on UK roads, but the

total motor stock is steadily ageing due to decreasing

churn. As such, there is likely to be a certain amount

of pent-up demand, which should eventually feed

through into higher sales volumes and greater uptake

of car finance.

Banks have become more risk-averse

A difficult and uncertain economic environment has

reduced consumer appetite for spending and

borrowing. Nevertheless, demand is likely to be

outstripping supply, as constraints on the availability of

consumer credit continue to inhibit the take-up of

unsecured loans.

On a positive note, lenders are benefiting from good

margins and a reduction in bad debt. According to the

Bank of England, unsecured debt write-offs fell in each

of the five quarters to September 2011. However, the

recent rise in unemployment (a trend that is set to

prevail) could ultimately lead to another spike in bad

debts.

The reduced availability of unsecured loans (the main

competitor product) and a low base rate are also

benefiting the point-of-sale car finance market.

Regulatory developments

In February 2011, a new EU directive on consumer

credit came into effect, requiring lenders to provide

adequate explanations to consumers about the credit

on offer; to assess the creditworthiness of applicants;

and to give customers the right to withdraw from an

agreement within 14 days and the right to make partial

early repayments. The new requirements are

predicted to cost lenders up to £1.4 billion over the

next decade. On the plus side, advertised interest

rates now only have to be offered to 51% of successful

applicants (previously 66%).

The OFT recently issued new guidance on

irresponsible lending. The new guidelines place greater

emphasis on lenders to ensure that loans are

affordable by requiring the introduction of more

rigorous affordability assessments.

The government is planning to shift the responsibility

of regulating consumer credit from the OFT to the

Financial Conduct Authority (FCA), which is due to

replace the Financial Services Authority (FSA) at the

end of 2012.

Companies, Brand and

Innovation

Ford Credit, VWFS and GMAC are the market

leaders

The car finance market is served by a number of

specialist providers, as well as the finance arms of

some of the largest car manufacturers.

Mintel calculates that in the point-of-sale new car

market, Ford Credit, Volkswagen Financial Services

(VWFS) and GMAC are the largest providers of

finance in the UK, followed by RCI Financial Services

and Banqua PSA Finance (not necessarily in that

order).

Another key player, Santander Consumer Finance, is

steadily growing its share of the market, via

establishing new partnerships with manufacturers and

dealers.

Black Horse is the largest provider of used car finance

and is also the market leader in the motorbike finance

market.

Recent innovation

In the car finance market – like in other sectors of the

consumer credit industry – there is little scope for

real product innovation, indicative of its maturity and

fairly stringent regulation. However, one

manufacturer, Vauxhall, may have set a new trend with

the introduction, in July 2011, of a new flexible and

personalised car finance package.

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Car Finance


Elsewhere, in the online marketplace, there have been

some recent developments, with the arrival of the

world’s first car finance price comparison site

(FinanceAcar.co.uk) and the UK’s first non-prime car

finance calculator (launched by Moneybarn).

Limited above-the-line advertising

Adspend on car finance products increased nearly

fourfold in the year to September 2011, but from a

very small base, to just under £2 million.

The market is more heavily reliant on below-the-line

marketing, used at the point of sale.

Distribution mix

Car finance products, such as HP, PCP and lease

purchase, are designed to be sold at the point of sale.

As such, new and used car dealers generally constitute

the primary distribution channel. However,

developments in technology and recent changes to EU

legislation (relating to the Block Exemption) have

opened up the market by allowing new entrants to

emerge and exploit new channels of distribution,

notably the internet.

Franchised dealers, of which there are just under

5,000 in the UK, dominate the sale of new cars, and

thus new car finance. They also account for a small

share of the nearly new/used car market, although in

this sector independent/online dealers and car

supermarkets together generate a greater proportion

of sales.

Figure 2: Where purchased main car from, 2011

Base: car owners aged 17+

Taken from the TGI survey of around 25,000 adults

Source: GB TGI, Kantar Media UK Ltd Q4 2011 (Jul-

Jun)/Mintel

The Consumer

Trends in car ownership, annual mileage and

vehicle replacement

Reflecting the economic downturn and rising motoring

costs, there has been a steady fall in the proportion of

multiple car owners and in the proportion of people

with a full driving licence since 2008.

TGI GB Q4 survey data show that in 2008 40% of UK

adults had one car (rising to 44% in 2011) and 39% had

two or more cars in their household (falling to just

30% in 2011). Similarly, in 2008, some 71% of UK

adults had a full driving licence, but by 2011 the

proportion had fallen to 68%.

Most drivers clock up 12,500 miles a year or less,

although a significant minority (14%) exceed this

amount.

Just over half (56%) of all car owners spent a minimum

of £6,000 on their main car, while around a third

(32%) say that they replace their main car at least

every three or four years.

68% of UK adults have their own car

Figure 3: Proportion of adults who drive and own a

car, October 2011

Base: 1,439 adults aged 18+

Source: Ipsos MORI/Mintel

Some 68% of UK adults – equivalent to 34 million

people – drive a privately bought/leased car, while a

further 1% drive a company car, 1% drive a car

belonging a partner or parent and 6% drive but do not

currently have a car.

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Car Finance


Car ownership peaks in the 55-64 age group (82%),

although penetration rates are nearly as high among

those aged 35-54 and 65-74.

ABs and those aged 55-74 are most likely to own a

new car (39%).

9% bought their last car with dealer/manufacturer

finance

Figure 4: Method of financing most recent car

purchase, October 2011

Base: 927 car owners aged 18+

* includes personal loans which are marketed for the sole

purpose of buying a car, ie special car loans

** comprise HP, PCP and leasing plans


Among those who use car finance, the most popular

option, by far, is an HP agreement, recording a

penetration of 8%. PCP and lease purchase plans have

much lower penetration rates (1% each). Men and

women record the same take-up rate for car finance,

although women are slightly more inclined to opt for

HP and less likely to go for lease purchase.

14% of adults plan to buy a car within the coming

year

Figure 5: Intention to buy a car within the next year,

October 2011

Base: 1,439 adults aged 18+


Some 14% of UK adults plan to buy a car within the

next 12 months, which equates to 7 million people. A

further 5% of UK adults (equivalent to 2.5 million

people) say they are, as yet, unsure whether they will

buy a car or not.

Among those with definite plans to buy a car, around

4% (circa 2 million) intend to buy a new car and 9%

(4.5 million) intend to buy a used car. A further 2% (1

million) have yet to decide what type of car to buy.

Attitudes towards car finance

Around four fifths of car owners and prospective car

buyers say that they like to own their car outright (ie

81% of car owners and 79% of prospective car

buyers). The propensity to hold this view tends to

increase with age.

A fifth (20%) are against buying anything on credit and

so are unlikely to be interested in a car finance

agreement, or personal loan for that matter.

At the other end of the spectrum, roughly one in ten

say that they would be unable to buy a car without a

loan or finance agreement (ie 9% of car owners and

10% of prospective car buyers).

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Car Finance


What we think

It is a tough time for car finance providers, as it is for

the wider car manufacturing and retail industries. The

slump in new car registrations is a concern, at least

over the near term, along with uncertainty linked to

the economic situation, rising unemployment and slow

income growth.

On the positive side, car finance providers have

recently improved their overall penetration of the new

private car market, through the use of special

promotions and competitive pricing.

The severe contraction in the personal loan market

has also helped to maintain sales of car finance

agreements over the past couple of years, although

sales volumes are still noticeably down on their

2003/04 peak.

Going forward, the industry will need to adapt to

changing consumer needs, buying habits and budgets,

through offering innovative products and convenient

access points. Some providers have recently launched

more flexible and online propositions, and Mintel

believes that these represent positive market

developments.

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Car Finance


Sarah Hitchcock

Senior Financial Services Analyst

E-mail [email protected]

Telephone +44 (0) 20 7606 4533

Sarah has worked for Mintel since 2001, both as a member of

the UK Financial Services team and a freelance report writer.

She writes a range of UK finance and insurance reports,

carries out trade research, commissions consumer research

and provides client support. Before joining Mintel, Sarah

worked for the Financial Times as a member of the Research

projects Team. She has a BA (Hons) in Humanities and an MA

in Information Studies.

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