Car finance requests boom after regulation shake-up

Over the last few years there have been significant changes to the car financing industry and the way in which consumers buy cars. Tim Waterman, Zopa’s chief commercial officer, writes

Tim Waterman, chief commercial officer, Zopa

The car finance industry has been dominated by face-to-face interactions, with in-person dealership negotiations being the norm for customers. Traditionally, this has meant that salespeople lead the conversation on financial details and payment plans during the process of purchasing a car.

Following its review of the car finance market, the Financial Conduct Authority (FCA) implemented a ban on discretionary commission models and implemented rules on commission disclosure for car finance brokers, marking a clear turning point for the industry.

With discretionary commission rules having come into effect in January this year, it’s expected that this change could save customers £165m a year. In one of the models the FCA commission investigated, a typical customer on a commission-based four-year finance deal for a £10,000 car would be likely to pay around £1,100 more in interest than if the broker were paid a fixed fee.

It’s still early days for the commission ban, so while its financial impact for drivers will continue to become clearer, it has come at a pivotal point for the industry. We believe there are several factors that have resulted in a significant shift in consumer attitudes to car financing this year, with the move to digital sitting at the heart of the transition.

The migration to digital

In multiple industries, innovation has changed the way customers find and buy the products they want. From holiday booking apps to online banking, industries have adapted to suit customers’ needs. While this digital shift has transformed many industries since the dawn of the internet, the motor industry has been slow to respond.

Back in 2019, Zopa commissioned research that explored consumers’ attitudes towards accepting car finance deals in dealerships. The study revealed that over two thirds of UK adults (68%) had accepted the first car finance deal offered to them at a dealership, without shopping around for a better deal.

A further 48% of people who had taken out car finance at a dealership admitted to finding the whole process stressful. However, the impetus for change came when the FCA review made people aware they might not be getting the best deal on finance. The pandemic also meant that dealerships were closed or limited in their operations for significant periods of time, prompting consumers to shop around online for better deals.

This drive for digital means consumers are now looking for ‘do it yourself’ options when it comes to financing a car that are transparent, quick and which fit their needs. Drivers don’t want to have to deal with haggling to get the best finance option available.

Increasingly, car finance providers are having to either innovate to meet changing consumer expectations or pull out, with new providers coming into the market to respond to the demands. From internal customer research conducted in 2020, control, reassurance and certainty emerged as key priorities for Zopa customers when it came to online buying.

At Zopa, our Hire Purchase (HP) product is tailored to those needs, it allows drivers to find a car financing option in as little as three minutes online. It returns a personalised rate so the customer knows exactly what they will pay without their credit file being marked. Integration with trusted partners means that Zopa can also help customers check the reputation of the dealer and history of the car.

A catalyst for change – the pandemic 

The pandemic has also been a catalyst for consumer behavioural changes, stimulating an increase in uptake of digital products and services. Recurrent lockdowns and social distancing restrictions have spurred a move to the online world throughout different sectors. Car financing is no exception, as with dealers shut or restricted in how they could operate we’ve seen digital-first car buying experiences become more and more popular.

The changes to buying behaviour and in response to the FCA ruling have also come at a time where there is an uplift in demand in the car market. The pandemic saw people increasingly keen to use personal vs. public transport and also led to an increased level of saving amongst many sectors of the population. As restrictions have eased and consumer confidence has risen, consumers have started to spend saved money on major purchases, like cars, with many going online to do so. Zopa saw a 108% increase in loan requests between February and June 2021, compared to the same period last year.

More expensive cars are on the rise

Our most recent car financing data shows that people have also now been taking out car finance loans on increasingly expensive cars.

As people continue to work from home and UK-based travel dominates holiday plans, spending more on car financing options could be because people want to splash out on getting from A to B in comfort. Additionally, Zopa’s internal customer research last year showed that some families were selling or thinking of selling the second family car and upgrading the first one to a nicer model.

At the start of the pandemic, people were cautious about spending as many predicted some personal financial shocks. For those who were able to save, they have been afforded a sense of financial security, which is now giving them the confidence to spend. The average amount requested through Zopa’s car financing service increased 152% compared to the previous year immediately after the FCA ban and as the UK released its roadmap for easing lockdown.

The intersection of these shifts in behaviour, combined with the FCA’s ruling on commission, has created the perfect environment for car finance to continue to evolve. As drivers embrace the freedom of sourcing their own finance, the opportunities to find fair options that work for them will only get greater – and agile digital financial providers are ready to answer the call.