Car Finance

Executive Summary UK January 2012

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.

Car Finance Executive Summary UK January 2012

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

2.5

2.0

Market volume (m)

1.5

(m) 1.14

Best case (m) 1.61 Mintel forecast (m) 1.33 Worst case (m) 1.06

1.0

0.5

Confidence intervals 95%

0.0 0 2006

90%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

70% 50%

Est. Actual Forecast

SOURCE: FLA/MINTEL

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.

Car Finance Executive Summary UK January 2012

Market Factors
The retail car industry Both new and used car sales declined over the 200408 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.

Car Finance Executive Summary UK January 2012

Elsewhere, in the online marketplace, there have been some recent developments, with the arrival of the worlds first car finance price comparison site (FinanceAcar.co.uk) and the UKs 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+

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.

Taken from the TGI survey of around 25,000 adults

Source: GB TGI, Kantar Media UK Ltd Q4 2011 (JulJun)/Mintel

Car Finance Executive Summary UK January 2012

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+

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+

Source: Ipsos MORI/Mintel

* includes personal loans which are marketed for the sole purpose of buying a car, ie special car loans ** comprise HP, PCP and leasing plans

Source: Ipsos MORI/Mintel 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.

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).

Car Finance Executive Summary UK January 2012

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.

Car Finance Executive Summary UK January 2012

Sarah Hitchcock
Senior Financial Services Analyst
E-mail sarahh@mintel.com 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.