A transformation in
voluntary terminations

T

here can be little overstating the impact of the Covid-19 pandemic on the motor finance sector. Prime customers suddenly became subprime; reliable payers were suddenly struggling; the entire industry had to overhaul its approach.

Combined with the FCA’s ban on vehicle repossessions, companies in the industry certainly had much to ponder.

“During the pandemic, there was a situation where the finance world had to change their whole model in terms of voluntary terminations or repossessions,” explains Martin Potter, group MD at Aston Barclay. “If someone fell back on payments due to Covid-19 you couldn’t just take the car back.

“There wasn’t a clear understanding of what the pandemic would do at the start. If you think about that first quarter, what we went through, we didn’t have a clear understanding of what it would do to the consumer,” says Philip Nothard, insight and strategy director at Cox Automotive.

While that uncertainty drove a great deal of conservative behaviour among financiers and customers alike, in the aftermath of the lockdowns things have taken a surprising change again.

“We had a number of voluntary terminations from March to September 2020, but as a result of coming out of Covid we’ve certainly seen, from a finance house point of view, voluntary terminations have dropped off in volume,” Potter says. “I think the main reasons are furlough payments which mean people have a bit more disposable income.”

Alongside the Covid-19 pandemic lockdowns, there has also been a shortage in semiconductors that has hit everything from the automotive industry to personal electronics, and it has had a knock-on effect on motor finance.

“It’s not just demand for raw materials, it’s that while car factories were shutting down people were buying new laptops so resources were directed there,” says Peak Collections MD Simon Shuttleworth. “It will take a while to normalise.”

The most visible effect of this shortage has been the value of used cars soaring.

“Average prices of vehicles have gone up so much that vehicles which might be subject to voluntary terminations have equity in them,” Potter points out. “Those cars are still coming into the automotive network but they’re not coming from finance houses into auction as much because they get disseminated around the dealer and retail network.”

“If there was any rise in terminations the sector would accept them with open arms because of the shortage of product, and the values the product is achieving at the minute,” Nothard adds.

“If there are end-of-contract or terminated vehicles, in today’s market they’ll be priced positively because the contracts would have been written at a period of residual value that is nowhere near where the market is today.”

This explosion in used car value has all but made the role traditionally played voluntary terminations redundant.

“Voluntary terminations are normally what you’d get when someone’s been in a car for a while and they’re looking to change. So the dealer says ‘You can get out of this, hand it back to the financier and I’ll sell you a new one.’” Shuttleworth says.

“Now the value of used cars is preventing that. The value of the car was less than what was owed, but now it is more so it’s suddenly a very valuable trade-in option. The same is the case with PCP contracts that are coming to an end. It wasn’t uncommon to hand it back, but now customers think ‘I might as well sell it myself.’”

The current situation has created challenges in other areas, but as far as the situation around voluntary terminations is concerned, it is a good thing on all sides.

“From the finance house’s point of view, it’s a good thing. They’re not getting stuck with a car that’s worth less than owed,” Shuttleworth says. “They’re seeing the car sold and the finance settled. For banks and finance companies it’s great news.”

For dealers, voluntary termination has always been an option they could encourage customers to take up to free them to purchase a new vehicle, but with the high value of the used car in today’s market, a trade-in is a far more appealing prospect.

“Retailers have always been aware and use it as a sales opportunity to refresh their stock. They know if someone has got to that point in their agreement they will highlight that they can voluntarily terminate and get a new vehicle,” Potter says. “At the moment that’s not the reason they’re doing it. They’re doing it because there’s equity in the car and they can offer them a good price.”

The current state of affairs also suits customers.

“I think a lot of the time, in the normal voluntary termination market, customers were advised that it makes no mark on their credit history, but it is noted,” Shuttleworth says.

“It’s not detrimental, but it is marked. But that’s not an issue now because there’s no detriment to finance houses being given a vehicle back and thinking ‘I’ve got a huge amount of equity here.’ I’ve been speaking to people recently and even one of my clients had a PCP car, two years into a three-year deal and the dealer approached them offering a new car because the used one had gone up in value so much.”

When a lot of people are doing well out of an asset holding a high price, it is understandable that some might be sceptical, or suspect that it is a bubble that is going to burst. But while hopefully the automotive supply chain will self-correct, which in turn will see used cars diminish in price, it is unlikely there will be a dramatic bursting of the bubble.

“We have various new vehicles on order for various lengths of time, and spring to summer next year I’d expect it to normalise,” Shuttleworth says.

“The used car market will remain very strong for the next 12 months or so. The current situation where customers have equity will continue for that time,” Potter agrees. “Vehicles will only revert back to the finance house when values start to drop creating a negative equity situation.”

“The only caveat is that we don’t necessarily know what is around the corner,” Nothard says. “All things at the minute seem fairly stable. I’ve not seen any significant impact yet from the end of the furlough scheme. The demand for product is huge.

"Within our wholesale market, we’re seeing first-time conversions in excess of 90%, which we’ve never seen before. All makes, values, ages are at significant highs. There’s no real worry on the horizon just yet.”

“As new car availability ramps up this will calm down, so I wouldn’t expect major fallout,” adds Shuttleworth.

“It’s a question of when that will happen. But depending on who you talk to you can hear different ideas. I wouldn’t want to be a risk analyst setting a residual value on a PCP deal.”