Are the wheels about to fall of car finance?
Discussion
Eyersey1234 said:
My understanding is the cars that are returned off lease get sent to auction
As and when it suits. The pace at which cars get put back out into the market plays a role in controlling the values against which the finance pyramid is constructed. One of the huge benefits of 'house' finance is that you retain control of the product and therefor some control on its value for long after it's initial sale. It's why there is such a strong argument for stripping the finance element from the manufacturer. Individuals can then obtain finance that is specifically tailored to them, salesmen are no longer incentivised to sell finance packages that may not be suitable and the manufacturer loses control of used values letting true market forces prevail.
Which, in theory, leads to better prices for absolutely everyone regardless of how or what they are buying.
DonkeyApple said:
As and when it suits. The pace at which cars get put back out into the market plays a role in controlling the values against which the finance pyramid is constructed.
This is one bit of the PCP model I've always had trouble understanding, and I expect you'll be better placed than anybody else here to clarify it!I've often heard how the more 'premium' manufacturers are able to offer attractive lease/PCP rates because of their high residuals, and those residuals are managed by the manufacturer restricting the supply of ex-lease/PCP cars into the market. That means that the manufacturer gets a higher residual for the returned cars they are selling on, but nothing in respect of those cars which they don't. Yes the manufacturer could release those 'surplus' cars onto the market eventually, but in the meantime they have been banging out as many new cars as they can sell, i.e. they're not restricting the flow of new cars. So the number of cars 'held back' will grow all the time. The only ways out that I can see are 1. at some point a massive backlog is released onto the market, 2. they are written off altogether, or 3. they are exported. 1 doesn't seem to have happened, 2 seems mad and I can't believe 3 is more financially attractive than just selling them here in the UK. I feel I must be missing something!
DonkeyApple said:
As and when it suits. The pace at which cars get put back out into the market plays a role in controlling the values against which the finance pyramid is constructed.
One of the huge benefits of 'house' finance is that you retain control of the product and therefor some control on its value for long after it's initial sale. It's why there is such a strong argument for stripping the finance element from the manufacturer. Individuals can then obtain finance that is specifically tailored to them, salesmen are no longer incentivised to sell finance packages that may not be suitable and the manufacturer loses control of used values letting true market forces prevail.
Which, in theory, leads to better prices for absolutely everyone regardless of how or what they are buying.
It would be hard to get that model to stack up though - as there is that little profit left in cars for dealers these days, the margin comes from selling finance. The dealership - and thus the salesman - will be incentivised to sell the product that earns them the most commission.One of the huge benefits of 'house' finance is that you retain control of the product and therefor some control on its value for long after it's initial sale. It's why there is such a strong argument for stripping the finance element from the manufacturer. Individuals can then obtain finance that is specifically tailored to them, salesmen are no longer incentivised to sell finance packages that may not be suitable and the manufacturer loses control of used values letting true market forces prevail.
Which, in theory, leads to better prices for absolutely everyone regardless of how or what they are buying.
Roger Irrelevant said:
This is one bit of the PCP model I've always had trouble understanding, and I expect you'll be better placed than anybody else here to clarify it!
I've often heard how the more 'premium' manufacturers are able to offer attractive lease/PCP rates because of their high residuals, and those residuals are managed by the manufacturer restricting the supply of ex-lease/PCP cars into the market. That means that the manufacturer gets a higher residual for the returned cars they are selling on, but nothing in respect of those cars which they don't. Yes the manufacturer could release those 'surplus' cars onto the market eventually, but in the meantime they have been banging out as many new cars as they can sell, i.e. they're not restricting the flow of new cars. So the number of cars 'held back' will grow all the time. The only ways out that I can see are 1. at some point a massive backlog is released onto the market, 2. they are written off altogether, or 3. they are exported. 1 doesn't seem to have happened, 2 seems mad and I can't believe 3 is more financially attractive than just selling them here in the UK. I feel I must be missing something!
I dont think there is a massive backlog held back. They will push certain cars through certain auctions that they know will attract the best prices. They'll grade the cars and send them to invitation only franchised dealer auctions and sell off the remainder off wherever they know they will get the best price for it.I've often heard how the more 'premium' manufacturers are able to offer attractive lease/PCP rates because of their high residuals, and those residuals are managed by the manufacturer restricting the supply of ex-lease/PCP cars into the market. That means that the manufacturer gets a higher residual for the returned cars they are selling on, but nothing in respect of those cars which they don't. Yes the manufacturer could release those 'surplus' cars onto the market eventually, but in the meantime they have been banging out as many new cars as they can sell, i.e. they're not restricting the flow of new cars. So the number of cars 'held back' will grow all the time. The only ways out that I can see are 1. at some point a massive backlog is released onto the market, 2. they are written off altogether, or 3. they are exported. 1 doesn't seem to have happened, 2 seems mad and I can't believe 3 is more financially attractive than just selling them here in the UK. I feel I must be missing something!
I think the "restricting" the market theory is pretty much a fallacy. Theres always demand among buyers for clean quality 3 year old cars as many people see that as the sweet spot. If you can incentivise people to continue buying those then you effectively kick the problem out to older cars that become practically worthless sooner and end up off the road.
Also, most manufacturers are offering incentivised used car PCP deals now at high interest rates. Thus payments look reasonable but it allows the 3 year old cars to stay in demand and prices to stay high.
Edited by daemon on Monday 25th September 17:02
daemon said:
It would be hard to get that model to stack up though - as there is that little profit left in cars for dealers these days, the margin comes from selling finance. The dealership - and thus the salesman - will be incentivised to sell the product that earns them the most commission.
But if they keep the second hand price high, and can ensure the cars return to the dealer, then they get a second bite at finance.In real terms (adjusted for inflation) the retail prices of the 'premium' brands appear lower than they were 10 or 20 years ago.
However consolidation of manufacturers, improved production technology, platform and component sharing, stripping out of quality of engineering in 'unseen' areas and massively increased volumes / buying power mean production costs have reduced even further.
The published retail prices are massively inflated relative to the unit production cost of the vehicle, allowing the manufacturers' finance arms to offer 'manufacturer support' AND attractive finance terms AND take a hit on the 'guaranteed' residuals.
The entire market is manipulated. Customers are paying too much but feel they are getting a good deal 1) relative to the published retail price; and 2) relative to what the equivalent vehicle (e.g. E-class / 5-series whatever) would have cost them historically.
It's a highly ingenious marketing strategy.
However consolidation of manufacturers, improved production technology, platform and component sharing, stripping out of quality of engineering in 'unseen' areas and massively increased volumes / buying power mean production costs have reduced even further.
The published retail prices are massively inflated relative to the unit production cost of the vehicle, allowing the manufacturers' finance arms to offer 'manufacturer support' AND attractive finance terms AND take a hit on the 'guaranteed' residuals.
The entire market is manipulated. Customers are paying too much but feel they are getting a good deal 1) relative to the published retail price; and 2) relative to what the equivalent vehicle (e.g. E-class / 5-series whatever) would have cost them historically.
It's a highly ingenious marketing strategy.
Evanivitch said:
daemon said:
It would be hard to get that model to stack up though - as there is that little profit left in cars for dealers these days, the margin comes from selling finance. The dealership - and thus the salesman - will be incentivised to sell the product that earns them the most commission.
But if they keep the second hand price high, and can ensure the cars return to the dealer, then they get a second bite at finance.I was talking about new car sales and also i dont understand what you're saying? How has commission on new car finance got anything to do with keeping second hand prices high?
daemon said:
It would be hard to get that model to stack up though - as there is that little profit left in cars for dealers these days, the margin comes from selling finance. The dealership - and thus the salesman - will be incentivised to sell the product that earns them the most commission.
That doesn't make sense. If they want to make money from selling financial products then they are free to do so. Likewise if they want to make money selling cars they are free to do so. The market would adjust rather rapidly to the two being made separate activities. After all, the only reason they don't currently make money on the car sale is because they have chosen to make their profit on the finance sale and use the car number as a tacky incentive to get the debt deal away. It also has interesting tax implications as the finance arms are typically run via places like Luxembourg. Frankly, all consumer finance should be removed from all retailers. Let the lending market run systems thatbinstantly make credit available to you as an when needed. It's easy enough. It also brings in competition to lending which is currently very poor in the car market due to the massive control the manufacturer bank has over the ticket price of the goods. It's a horribly skewed field where they can block out other lenders by manipulating RRP.
Let lenders compete on price and let car venders compete on price. The consumer desperately needs the proper price competition and comparison of an open market in both areas.
And get rid of those fake 'zero interest' deals. Frankly the biggest scam of the last decade.
DonkeyApple said:
daemon said:
It would be hard to get that model to stack up though - as there is that little profit left in cars for dealers these days, the margin comes from selling finance. The dealership - and thus the salesman - will be incentivised to sell the product that earns them the most commission.
That doesn't make sense. If they want to make money from selling financial products then they are free to do so. Likewise if they want to make money selling cars they are free to do so. The market would adjust rather rapidly to the two being made separate activities. After all, the only reason they don't currently make money on the car sale is because they have chosen to make their profit on the finance sale and use the car number as a tacky incentive to get the debt deal away. It also has interesting tax implications as the finance arms are typically run via places like Luxembourg. However you seem to be talking about removing a dealers ability to sell finance entirely??
Seperating out the finance entirely would never in a million years fly and whilst it might sound like a nice idea it would never work
Firstly, car prices are low because consumers have the entire market to chose from and they usually chose from the lowest (or one of the lowest) sellers. Its extremely difficult to get people away from that mindset. Thus the profit is topped up these days with the add ons and the commission on finance.
So if you separate out the finance product then the dealers will have to charge more anyway to cover their overheads, thus offsetting any perceived "saving" for the consumer.
People would then either have to get unsecured personal loans BEFORE they go near a dealer, OR wait until they find the car they want and then try and find a company who will give them a secured loan against it.
You'd then have dealers potentially having to "hold" cars on the hope that customers could and would go off and get the finance sorted?
If you want to think its a viable idea and bounce it around on a forum thread then fine, but in the real world (a) its not and (b) its never happening in a million years - just like there was no "retribution" of the ombudsman.
Edited by daemon on Monday 25th September 17:52
Edited by daemon on Monday 25th September 17:53
daemon said:
I believed you were talking about a scenario whereby a dealer could offer finance, but that it wouldnt be manufacturer backed finance. Thus they'd end up being incentivised to sell the finance product that had the highest commission anyway.
However you seem to be talking about removing a dealers ability to sell finance entirely??
Seperating out the finance entirely would never in a million years fly and whilst it might sound like a nice idea it would never work
Firstly, car prices are low because consumers have the entire market to chose from and they usually chose from the lowest (or one of the lowest) sellers. Its extremely difficult to get people away from that mindset. Thus the profit is topped up these days with the add ons and the commission on finance.
So if you separate out the finance product then the dealers will have to charge more anyway to cover their overheads, thus offsetting any perceived "saving" for the consumer.
People would then either have to get unsecured personal loans BEFORE they go near a dealer, OR wait until they find the car they want and then try and find a company who will give them a secured loan against it.
You'd then have dealers potentially having to "hold" cars on the hope that customers could and would go off and get the finance sorted?
If you want to think its a viable idea and bounce it around on a forum thread then fine, but in the real world (a) its not and (b) its never happening in a million years - just like there was no "retribution" of the ombudsman.
It's precisely how it worked prior to the removal of the regulation that was originally in place to prevent the practice for very good reason. However you seem to be talking about removing a dealers ability to sell finance entirely??
Seperating out the finance entirely would never in a million years fly and whilst it might sound like a nice idea it would never work
Firstly, car prices are low because consumers have the entire market to chose from and they usually chose from the lowest (or one of the lowest) sellers. Its extremely difficult to get people away from that mindset. Thus the profit is topped up these days with the add ons and the commission on finance.
So if you separate out the finance product then the dealers will have to charge more anyway to cover their overheads, thus offsetting any perceived "saving" for the consumer.
People would then either have to get unsecured personal loans BEFORE they go near a dealer, OR wait until they find the car they want and then try and find a company who will give them a secured loan against it.
You'd then have dealers potentially having to "hold" cars on the hope that customers could and would go off and get the finance sorted?
If you want to think its a viable idea and bounce it around on a forum thread then fine, but in the real world (a) its not and (b) its never happening in a million years - just like there was no "retribution" of the ombudsman.
Edited by daemon on Monday 25th September 17:52
Edited by daemon on Monday 25th September 17:53
It would work absolutely fine and be really rather easy to implement in this modern age of online lending.
And no it wouldn't lead to higher prices. Being able to wrap finance products directly into purchases does. Especially when it deliberately muddied the waters.
And no, people wouldn't have to wait, all they would need is a centralised credit account. None of this is reinventing the wheel.
DonkeyApple said:
It's precisely how it worked prior to the removal of the regulation that was originally in place to prevent the practice for very good reason.
Really?? Because i worked for a Austin Rover dealer as far back as 1988 and we were offering HP finance from third party companies and getting incentives and commission from them - we certainly didnt rely on the customer going off and coming back when they'd finance sorted. So if it was "precisely" like that, then it was at lease a generation ago, and therefore not relevant to todays market.
DonkeyApple said:
It would work absolutely fine and be really rather easy to implement in this modern age of online lending.
Even the simple mechanics of it - it would either have to be a personal loan (hard for a lot of people to get) OR you'd have to go and sort it out AFTER you agreed the dealer price with the car. So then the dealer is there waiting on you coming back hopefully to take the car.OR you install some sort of industry wide yet independent portal that your customer logs on to in the presence of the dealer and plugs it all in themselves - very difficult to build and roll out effectively.
DonkeyApple said:
And no it wouldn't lead to higher prices. Being able to wrap finance products directly into purchases does. Especially when it deliberately muddied the waters.
How would it not?? How would dealers make up the loss of the finance commissions by doing anything other than pushing up prices? Do you really think the tiny margins on new cars keep those big showrooms going? Or are you proposing doing away with all of those as well?DonkeyApple said:
And no, people wouldn't have to wait, all they would need is a centralised credit account. None of this is reinventing the wheel.
Which isnt in place currently, therefore you WOULD have to "invent" an end to end system to manage it and linkin across all financial institutions that fed in to the portal.And whos going to pay for that other than the end customer through increased rates?
Its a really nice idea. Lovely "utopia" feel to it, but its not happening here in the real world.
You've talked today about how little appetite there is for change from the FCA yet you really think what you're proposing is a realistic option?
Edited by daemon on Monday 25th September 18:52
Of course it exists already. It's how margin trading is done. Electronic credit lines. Done for years. It can now be done via apps and you can easily blend it in with comparison services.
All a consumer needs to do is chose what they want and the vendor processes it through existing portals.
All you'd simply be doing is dragging an industry into the modern world. Get rid of comm salesman and the all the lending trickery.
Consumer finance is a big scam and in desperate need of an overhaul starting with the removal of tied, commissioned and unqualified debt salesmen from the retail environment.
All a consumer needs to do is chose what they want and the vendor processes it through existing portals.
All you'd simply be doing is dragging an industry into the modern world. Get rid of comm salesman and the all the lending trickery.
Consumer finance is a big scam and in desperate need of an overhaul starting with the removal of tied, commissioned and unqualified debt salesmen from the retail environment.
Edited by DonkeyApple on Monday 25th September 19:04
DonkeyApple said:
And no, people wouldn't have to wait, all they would need is a centralised credit account. None of this is reinventing the wheel.
It exists already - in the form of a credit card. That you can borrow unsecured debt more cheaply than secured debt is one of the modern miracles. The only reason it is isn't used more widely for car purchases is because 98% of Joe Public wouldn't be able to borrow enough unsecured.
To start securing it by other than the manufacturer would generate an enormous amount of paperwork. It would also just shift the problem - suddenly you would have even more cheap debt pedlars on an agency basis much like the mortgage market issues of 2008.
So as much as it isn't perfect today it at least enables the problem to be contained to an extent as the balance sheets of the lenders are in most cases within the group accounts of the manufacturer
DELETED: Comment made by a member who's account has been deleted.
Exactly but they are not regulated as such. One way or another they must be recognised as financial product vendors and properly regulated. Or split. It's not exactly the first time that commissions have acted to split a company into two separate parts. DELETED: Comment made by a member who's account has been deleted.
+1Rather than try and split the two apart, i think we'll see a full move towards leasing then towards renting / car sharing / autonomous vehicles.
Splitting the finance from the car and ultimately the dealer will need to make bigger profits, the manufacturer will need to make bigger profits and the "independent" finance companies will need to make profits - all from an asset that depreciates heavily anyway. You're just cutting the same cake in a different way for arguably more parties to get profit.
DonkeyApple said:
Exactly but they are not regulated as such. One way or another they must be recognised as financial product vendors and properly regulated. Or split. It's not exactly the first time that commissions have acted to split a company into two separate parts.
I sort of agree with you.
Sort of.
That car salesman are incentivised on the sale of debt consumer debt products is in my a very dubious practice.
Should customers have more choice ? Yes absolutely. There is however already a whole raft of alternative providers out there competing for business providing not just loans but PCP, PCH, LP and so on. So should this be made more clear at Point Of Purchase ? Probably but as Daemon says how do you then stop the dealer (who by the way in 9 out of cases is a third party and not a vertical extension of the OEM / OEM’s captive bank) from simply pushing the punter to whichever lender is doing the best commission rates that month, quarter or whatever ?
Your app idea is fine in theory but I can’t see it taking off any time soon.
RSK21 said:
I sort of agree with you.
Sort of.
That car salesman are incentivised on the sale of debt consumer debt products is in my a very dubious practice.
Should customers have more choice ? Yes absolutely. There is however already a whole raft of alternative providers out there competing for business providing not just loans but PCP, PCH, LP and so on. So should this be made more clear at Point Of Purchase ? Probably but as Daemon says how do you then stop the dealer (who by the way in 9 out of cases is a third party and not a vertical extension of the OEM / OEM’s captive bank) from simply pushing the punter to whichever lender is doing the best commission rates that month, quarter or whatever ?
Your app idea is fine in theory but I can’t see it taking off any time soon.
But ultimately there really is absolutely no issue with consumers arranging their finance at third parties in advance of their transaction. The only person who wouldn't like that is the salesmen who are financially rewarded for hooking walk-in into lucrative 'house' products along with upselling £1 coloured strips for £2/month over 36 months.
DonkeyApple said:
I agree. The absolute minimum though is to halt car salesmen from selling debt on commission. It's not the 1980s any longer. Everyone knows the dangers of commission incentivising financial instruments.
Stopping the salesmen getting commission wont do anything to stop the dealership getting commission, so they will simply instruct the salesmen which products to promote. Likewise theres ways around direct commission that could never be traced.
DonkeyApple said:
And secondly if a car vendor wishes to sell financial products then they should have the equivalent of an IFA on site who will offer a suit of options and not some chap whos been on a course on how to sell 'house' products within the frail guidelines of the industry.
And whos going to pay your "independent" financial advisor? The dealership? So theres your independent advice kicked in to touch.Again, far too easy to pay lip service to something that in unpoliceable.
DonkeyApple said:
But ultimately there really is absolutely no issue with consumers arranging their finance at third parties in advance of their transaction. The only person who wouldn't like that is the salesmen who are financially rewarded for hooking walk-in into lucrative 'house' products along with upselling £1 coloured strips for £2/month over 36 months.
The dealership will have issue with it as they're the ones getting the big commission from the finance companies. Remove that and the dealership charges more for the cars in the first place, thus its passed on to the customer in higher cost in the first place.RSK21 said:
as Daemon says how do you then stop the dealer (who by the way in 9 out of cases is a third party and not a vertical extension of the OEM / OEM’s captive bank) from simply pushing the punter to whichever lender is doing the best commission rates that month, quarter or whatever ?
Your app idea is fine in theory but I can’t see it taking off any time soon.
Agreed, its a lovely idea, that is wholly unimplementable.Your app idea is fine in theory but I can’t see it taking off any time soon.
daemon said:
Agreed, its a lovely idea, that is wholly unimplementable.
Are you actually trying to say that a product cannot be sold unless the financial product is sold by the same entity? And re the point above, how on earth can you justify salesmen incentivised by commissions or commissions going to the 'house'?
We're simply aren't in the 20th century any longer and practices that have been halted post Crash in other fields should not be allowed to continue in the car industry.
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