A fight to the death in the world of car dealership

Personal loans vs dealer finance.

In a previous post, I expressed bafflement at an article warning car buyers to be wary of expensive finance arranged on the forecourt, at a time when all sorts of wonderfully inexpensive personal loan rates were apparently on offer from high street lenders.

I was baffled because half the “pricey” dealer finance providers the article was warning consumers about are owned by the same banks as the personal loans providers in any case, and because the other half are bankrolled by car manufacturers offering hugely subsidised interest rates that no sane bank would compete with.

I went on at some length about all this (I’m from the trade press… we don’t get out much), but the upshot was that, looking at the way the car finance business works, the assertion that customers should beware of forecourt finance is dubious at best. 

Of course, there’s a lot more to consider than just price when weighing up the pros and cons of two completely different financial products, but let’s face it - it’s price that matters when it comes to consumer judgement. So let’s settle this with numbers.

On the personal loan side of things, Bank of England data shows that the typical cost of a £5,000 loan has steadily risen every month for the last five years, from an average rate of 8.7 per cent in March 2007 to 15.8 per cent in April 2012.

Now, this figure is a mean of all lowest advertised rates in a given month, and does very little to reflect the actual average interest rate of personal loans underwritten in a given month.

And to be fair to the loan providers, there has been a hard core of aggressive players, supermarket players M&S, Sainsbury’s and Tesco among them, pushing in the opposite direction over the same period. In May, we tracked no less than seven lenders duking it out between 6.0 per cent and 6.3 per cent (for a theoretical loan of £8,500 over 4 years). But overall, this action has been drowned out in the Bank of England stats by the mass of more cautious lenders in the UK.

Now let’s look at what’s happening in the world of forecourt finance. As I have already alluded to, more than 50 per cent of all finance deals offered each month are subsidised by manufacturers, dropping them way beyond the competitive reach of the loan providers. Include deals where discounts or freebies are offered in terms of maintenance, service and the like, and you’re looking at 80 percent of all new car finance.

As for the remainder, a quick phone round all the big providers (who are, you will remember, major banks) confirmed that their average APR on deals actually offered to consumers currently varies between 8 per cent and 10 per cent.

OK, sure. This doesn’t look too hot compared to those 6 per cent deals from the high street. But let’s not forget that those figures are “representative” APRs: since the actual rate offered by a lender tends to vary hugely depending on a customer’s credit rating, they can only legally advertise a rate achievable by at least 51 per cent of applicants. Put it another way, and 49 per cent of borrowers end up paying a higher rate.

So: half of applicants to the most competitive loan providers are probably getting a cheaper deal than between 20 per cent and 50 per cent of new car finance applicants, to the tune of 2-4 per cent in interest rate terms. I’ll admit that there’s a certain amount of beermat mathematics involved in working this out, but the conclusion is clear: there’s not much in it.   

In all of this (and I promise I’ll talk about something different now), we’ve just been talking about the new car finance market, and customers with good enough credit ratings to be considered by the manufacturer captives and supermarket loan providers in the first place.

Next time, I’ll look at the hundreds of thousands of people who’ve been completely unable to find a way to finance a car purchase since 2008, and what on earth the industry is planning to do with them. Now that’s a struggle.

Photograph: Getty Images

By day, Fred Crawley is editor of Credit Today and Insolvency Today. By night, he reviews graphic novels for the New Statesman.

Photo: Getty Images
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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.