Fred Crawley and Charles Wheeldon talk to Steven Baillie, head of loans at Sainsburys Finance, about the supermarket giants plans in the motor finance market.
More than at any point in the past three years, dealer finance lenders are recognising personal loan providers as a source of robust competition in the car finance market.
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Chief among them, by many accounts, is Sainsburys Finance. Low APRs, growing loan volumes and a historical foray into PCP is putting the lender at the forefront of many motor finance providers minds when it comes to forecasting competition for the year ahead.
According to head of loans Steven Baillie, the company has steadily increased its business year-on-year over the past five years.
Although he refuses to disclose the total value written this year, citing commercial sensitivity, he can reveal that in the six months leading to March 2011, 35.7% of its loans were used to purchase cars. This represents the highest-ever proportion of customers citing buying a car as the purpose of their loan.
The supermarket giant began offering personal loans in June 1997, having already launched savings and credit card products four months earlier, setting itself up as an alternative to the high street banks. It also offered a PCP product called Drive, which it withdrew in March 2009.
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By GlobalDataBaillie explains: "At the time of launching Drive, some drivers were losing thousands of pounds, either because they struggled to find a competitive price for a new car, failed to minimise the impact of depreciation, or were unable to get the appropriate market value when selling or part exchanging their old car.
"There was also a risk that many company car drivers didnt realise they could have saved substantial sums by opting out of their existing schemes."
Drive, Baillie adds, "helped customers combat the escalating costs of purchasing a brand new car", and gave customers access to "the most competitive prices available for brand new cars, often significantly beating the on the road price quoted by manufacturers".
"Unfortunately," says Baillie, "our supplier, Lex Vehicle Management, decided to withdraw from the consumer market, and the economic forecast and downturn in new car registrations at the time didnt favour working with an alternative supplier."
When questioned about the risk aspect of offering personal loans rather than PCP or hire purchase, Baillie acknowledges that the credit risk and potential loss is higher as there is no asset backing the loan.
He adds: "However, there is a residual value risk for PCP or HP products. The provider is guaranteeing the value of an asset usually three years in advance and if the value falls they can be left facing the loss."
So will Sainsburys consider offering PCP or HP in future?
Baillie says: "We continually consider new initiatives and products. In terms of whether we would consider launching a PCP or HP product, the key consideration would be: is there enough stability in the residual values to maintain APRs that we deem acceptable for our customers?"
For the time being, Baillie predicts that the increase in the number of consumers funding new cars with personal loans will continue, largely because customers can find attractive rates on personal loans if they shop around.
The additional benefit of a personal loan, he adds, is the potential to be rewarded for custom. He cites Sainsburys reward loan package, which he says has an attractive rate and also provides double Nectar points on all Sainsburys shopping and fuel for two years.
But even if personal loans continue to increase in popularity, will this be occurring in the context of a retail market shrinking under reduced consumer confidence?
The companys latest Car Buying Index results, released on 2 September, revealed the collective planned spend on new and used cars over the next six months by UK consumers is £40.2bn.
After two years of steady increase, the latest index declined abruptly, by 22 percent, on the £51.3bn consumers intended to spend six months ago (which at the time was at a three-year high). However, the average amount people expect to spend on their car purchase has increased slightly to £7,236 although this is only £67 more than six months ago.
Baillie thinks the index decline is a real indication of how the economy is affecting peoples car buying plans.
"But when economic conditions toughen consumers will as they should do spend more time shopping around for the best deal," he says.
"We remain confident about demand and we will continue to offer competitive rates for our customers in line with market movements."
When asked if Sainsburys is planning any future links with car retailers, Baillie says the company continually looks for new distribution opportunities for loans that fit its brand and business model.
His primary focus and target market, however, is Sainsburys shoppers, hence the two-year Nectar deal.
In conclusion, Baillie stares into his crystal ball to predict the future for personal loans in the motor finance market.
"We believe personal loan providers will play an increasingly important role in the UK motor finance market in the coming years," Baillie says.
"This will be due to customers seeking different financial options suited to their personal circumstances in order to purchase cars, and a continued imperative to seek out the finance deals that offer them the best value as incomes are squeezed by the economic climate."
