Customers are finding it difficult to obtain car finance, the Irish motor dealers complain. PADDY COMYNReports
TWO MAJOR car retailers are to announce leasing plans in order to lure customers back to showrooms. Volkswagen Ireland and Fiat Ireland will reveal details of new leasing arrangements which will offer customers the opportunity to access a new car.
The global economic downturn and credit crunch that has followed means that Irish car buyers have found it difficult to obtain car finance. As we have reported here in Motors, car dealers have complained that this is one of the main factors that has lead to such dramatic reductions in car sales in the State. “As access to cash is getting harder for most people it is definitely stalling business as people simply don’t have the necessary cash to right their equity position and put a deposit on their next car,” says leading car retailer Paraic Mooney.
“The rules have changed substantially for consumer credit despite the ‘we are open for business’ claims of the various finance companies. I know that they have taken a beating on repossessions but their response in tightening things up is an overreaction in the extreme. If you have a credit card and miss or are late with your monthly payment just once, you turn up on Irish Credit Bureau statistics. That is sufficient in itself to rule your application.
“Clients are being asked for 25 per cent deposit where before zero or 10 per cent would be the order of the day. Terms are being reduced and the maximum term now is four years with some providers. Rates charged are being increased across the board. Banks are telling us that cars are not worth what we are asking for them, thus reducing the financeable amount or meaning the client needs a bigger deposit.”
A survey carried out by Peugeot among dealers in Ireland seems to bear this out. They found that 71 per cent of proposals were rejected and since they claim that the rejection rate industry wide is now 79 per cent, compared to September 2008 when there was a rejection rate of just 30 per cent. The survey showed that the average customer equity required for a new car purchase is 32 per cent, with the lowest equity required to ensure finance being 28 per cent.
Peugeot states that credit unions are now one of the biggest sources of finance, at 29 per cent. A spokesperson for the brand added, “a typical dealer had lost approximately 75 deals on new or used vehicles because of lack of finance”.
With many Irish lending institutions seemingly unwilling or unable to provide available credit for would-be car buyers, it may fall to the major car manufacturers to take the place of the banks in order to get customers through the door.
According to Ford Ireland’s chairman and managing director, the company’s own finance house is doing brisk business. “While the squeeze on credit generally has certainly contributed to the downturn in car volumes, our finance provider Ford Credit continues to actively seek business through our dealer network and will be a key part of our offering to customers as we prepare for the peak selling season in January. The statistics bear this out, with approximately 70 per cent of new car applications to Ford Credit receiving approval.”
Volkswagen Ireland is in the enviable position within the Irish Motor Industry of having its own bank and the brand now intends to use this financial might to get Irish customers back into the showrooms and into their cars. Speaking to Motors this week, Volkswagen Group Ireland’s managing director Paul Willis said that VW’s brands are able to offer competitive and innovative financial solutions to a host of new customers. “It appears to me that finance is becoming more challenging to get. There are a number of financial providers who have left Ireland and who were central to the motor business before 2007 and are now conspicuous by their absence. As part of our strategic development, a year before we purchased from the importer we set up the bank and it is a branch of our bank in Germany and we did that as we see financing as an integral part in the sale of the vehicle. At the time we didn’t see it as an advantage but now it is.
Volkswagen intends rolling out a number of programmes in 2010 to help customers avail of the money to buy a car. “The average time a car is financed is between four and five years and we would like to reduce this to two to three years. It is good for the consumers and good for us.”
From November, all VW vehicles will be available on 6.75 per cent APR, which is very competitive compared to the rivals. “The average is about 9.93 per cent for the customer in the street and this is available at the point of sale, so the dealership becomes a one-stop shop,” says Martin Ballard of Volkswagen Bank. “We are willing to lend and we have made no changing to our underwriting policy. One of the major advantages we have of being new to the market is that we don’t have all the legacy bad debt that everyone is trying to wash through their books. We don’t have a large book of loans that we thought were good going bad on us. On all the deals we get we accept about 60 per cent on new Volkswagens and this can go up as close to 67 per cent on Volkswagen and we can get answers on the deal within an hour and this gives us a very strong customer proposition.”
Volkswagen is piloting a personal contract purchase scheme on the new Polo, which essentially is a lease deal where the user pays for the use of the vehicle for a fixed period of time and has the option to enter into a balloon payment at the end to own the vehicle or else to refinance and get into a new or different vehicle. “We have a very competitive monthly rate to see how open the Irish consumer is to this type of product. You can have a Polo for €236 per month and we want to pilot to see if the Irish consumer is prepared to go through a contract purchase type of mechanism rather than the traditional hire purchase. It is about €50-€60 per month less than the usual hire purchase route,” says Willis.
“People are nervous of putting finance into a car for five years and this product has a guaranteed residual value. What we are trying to do is encourage people to have a shorter change cycle on a product that has high residual values. Let’s say someone comes to us from another brands and had a trade-in against the Polo, our dealer will quote what he thinks it is worth and this can be used as all or some of the product up to 20 per cent and the rest is cash back to the customer and there is guaranteed balloon at the end. The timing is perfect for where we are today.”
The benefits of lower payments according to VW, is that people can afford gap insurance and unemployment insurance. “One of the benefits of the bank and car firm working closely together is that our sole goal is to sell cars to customers through dealerships,” says Ballard. The Volkswagen Polo pilot scheme – Solutions – will be trialled with a view to rolling out to other models within the group.
Another brand chief who sees leasing as becoming increasingly important within the Irish context is Fiat Ireland’s managing director Adrian Walsh. Fiat made the break from its financial partnership agreement recently with Permanent TSB and it’s now looking at new schemes for 2010. “We did a -1 per cent at the start of this year and our approval rate for that was in excess of 75 per cent and we ran that for the first quarter and in the second quarter this just dropped. What we started finding was that the banks starting telling us what the values of cars were. Buyers with 30 per cent deposits were finding that even this wasn’t enough as institutions were pricing cars using all sorts of examples,” says Walsh.