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.

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.