Question to Chris Sutton:
Chris, has the rate for risk concept proved its worth in the
current market conditions? Where is the cut-off point for customer
risk?
Chris Sutton: It’s
impossible to say whether rate for risk is working at any given
time – you have to look at a portfolio’s performance across an
entire credit cycle. Rate for risk is based on common sense – it’s
based on the customer’s creditworthiness rather than the age of the
car.
Go deeper with GlobalData
The disadvantage for dealers is that it takes
away their autonomy in making pricing decisions, meaning they can’t
‘flex’ the rate – we give them a yes or no answer, and if it’s a
yes, then it’s at this particular rate.
Rate for risk delivers more to our bottom line
than we had expected it to, but it is still under 10 percent of our
total business. The income is better than predicted, but the bad
debt is worse than for non-rate for risk business, probably as a
result of adverse selection; we really need the whole market to
adopt it. If it’s used as a fall-back, that’s when it becomes
dangerous.
Peter de
Rousset-Hall: If someone will take credit at any rate,
they are much less likely to pay it back.
Question to John
Sinclair: John, what do you consider the future to be for
subprime motor finance lending?
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataJohn Sinclair:
There is good and bad news. The good news is that there will be
exponential growth opportunities in the subprime motor sector
simply because large numbers of sensible customers will be turned
away from their previous lenders who now have a lower risk appetite
or even capacity issues.
The bad news is that the challenges around
funding in the subprime finance market are still very difficult,
mostly because funding for this sector has been traditionally
sourced from banks.
Future funders will probably be
‘non-traditional’ funders in partnership with private equity
organisations, the latter of whom are aggressively active. It would
not be impossible for some motor manufacturers to become involved
in B2B funding of subprime lenders thus still accommodating
sensible customers but withdrawing from B2C risk such as two very
large manufacturers have done recently.
Subprime motor finance has an exciting future
with this sector potentially growing faster than others. Dealers
see the opportunity too, not only for incremental sales, but are
now far more willing to pursue new profit-share joint ventures as
opposed to the previous model of up-front limited recourse
commission which going forward is unsustainable.
Question to Steve
Gowler: Steve, is it time for captives to start thinking
about subprime finance for new car customers given that more and
more consumers are falling into the category of
near-/non-prime?
Steve Gowler: I’d
say the business model for captives is very different, and that
precludes looking at subprime. We live or die by our credit rating,
as a captive, as it determines our cost of funds, and the ratings
agencies are very concerned about the risks we take on with our
customers. Subprime doesn’t fit the captive business at all. My
view is to leave it to the specialists.
If we do have long-term customers who have
been with us for some time and whose circumstances have changed,
resulting in a damaged credit score, we may look at those people in
a different way to a completely new applicant. If it is an old
customer who has had some problems and then come back to us, we may
well be able to support them.
