Car finance

The subject of car finance comprises the different financial products which allows someone to acquire a car with any arrangement other than a single lump payment. The provision of car finance by a third party supplier allows the acquirer to provide for and raise the funds to compensate the initial owner, either a dealer or manufacturer.

Car finance is required by both private individuals and businesses. All types of finance products are available to either sector, however the market share by finance type for each sector differs, partly because business contract hire can provide tax and cashflow benefits to businesses.

Personal Car Finance

Personal Car Finance is a complete subsector of personal finance, with numerous different products available. These include a straightforward car loan, hire purchase, personal contract hire (car leasing) and Personal Contract Purchase. Therefore, car finance includes but is not limited to vehicle leasing. These different types of car finance are possible because of the high residual value of cars and the second hand car market, which enables other forms of financing beyond pure unsecured loans.[1]

Car finance arose because the price of cars was out of the reach of individual purchasers without borrowing the money. The funding for personal car finance is provided either by a retail bank or a specialist car financing company. Some car manufacturers own their own car financing arms, such as Ford with the Ford Motor Credit Company and General Motors with its GMAC Financial Services arm, which has now been renamed and rebranded as Ally Financial. Indirect auto lenders may set risk-based interest rate, or “buy rate,” that it conveys to auto dealers. Car companies may then allow their auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is typically called “dealer markup.” [2] Markups can generate compensation for dealers and some (those of GM's Ally and Honda) have been found to use the discretion to charge consumers different rates regardless of consumer creditworthiness.[2]

The funding supplier may retain ownership of the car during the period of the contract for certain types of financing. This interim ownership by a third party and subsequent leasing to the acquirer is far more typical for business assets than private ones, with the option of vehicle leasing being the major exception for private consumers.

The finance is arranged either by the dealer which provides the car or by independent finance brokers who work on commission.

Lenders

The leasing share of the US consumer automotive industry expected to grow by 18-25% [3] though this is growing again after the credit crisis cause major leasing companies to exit the market in the US. The credit crisis of 2008 and subsequent recession saw the second hand car market collapse and funding companies had to sell their returning cars at much lower prices than expected. Some major providers stopped offering private contract hire during this period.[4]

In the UK the FCA (Financial Conduct Authority) took over from the OFT (Office of Fair Trading) in April 2012. All companies who sell, advise, or promote financial products must be regulated and licensed under new FCA legislation.

The Finance and Leasing Association represents the asset, consumer and motor industry in the UK, which includes car finance. The FLA has a neutral website which explains all aspects of car finance for the private individual in the UK.

The Federal Trade Commission in the USA was responsible for protecting the rights of consumers in this market.[5] For auto loan questions or to submit a complaint, consumers can now contact the Consumer Financial Protection Bureau at (855) 411-2372 or visit consumerfinance.gov.[2]

According to Auto Finance Performance ranking by Auto News, Toyota Financial Services, Bank of America, Security Service FCU, BMO Harris Bank and SunTrust Bank were the global auto-finance industry leaders in 2015. The ranking criteria was determined by assessing financing service, pricing, number of representatives, and product placement.[6]

See also

References

  1. ↑ The Lease Guide
  2. 1 2 3 CFPB and DOJ Reach Resolution with Honda to Address Discriminatory Auto Loan Pricing. African-American, Hispanic, and Asian and Pacific Islander Borrowers Will Receive $24 Million
  3. ↑ Auto Evolution
  4. ↑ Yahoo Finance
  5. ↑ The Federal Trade Commission
  6. ↑ "Auto Finance Performance: The Nation's Top Lenders | Auto Finance News". www.autofinancenews.net. Retrieved 2015-11-16.
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