• As Base Rates have risen, so have loan interest rates
• Consumer outgoings have exceeded income for the first time in 30 years
• Arrears and default rates have been rising
• Underwriting has tightened with greater use of ‘rate for risk’ underwriting
• All areas of consumer credit are impacted, but classically secured dealer finance has benefitted in these conditions

Consumer confidence is vital to car buying and the recent rise in the UK Base Rate to 0.75% could dent this confidence, given an estimated 80% of car buyers need credit to finalise their purchase.

A further challenge could be the emergence of more stringent underwriting in the lending market with arrears levels reportedly rising also.

Changing credit conditions may be unwelcome, but on a more positive note, global wholesale stocking software provider Sword Apak’s analysis suggests that even with tighter credit conditions, dealers can succeed by adopting a more targeted approach to used car financing opportunities as Executive Vice President James Powell notes:

“The recent increase in the UK Base Rate will impact motor retailing with its inevitable knock-on effect on loan rates, underwriting and the cost of wholesale stocking. A potential ‘silver lining’ to this is that tighter underwriting is more likely to impact personal loans than secured loans, which could make dealer finance a more attractive option for consumers. We saw something similar immediately following the credit crunch in 2009, when access to personal loans became more difficult and often more expensive for many consumers.”  

As Powell notes, changes in the lending market are not just related to interest rates. At the end of July, the Office for National Statistics (ONS) reported that UK households saw their outgoings surpass their income for the first time in nearly 30 years. Alongside this, the Bank of England recently reported upon increasing arrears issues, most notably in unsecured lending.

The impact of all these factors had already led to loan rates rising ahead of the Base Rate increase, and wholesale finance was no exception, as there were clear signs that lenders were becoming more prudent in their underwriting.

Looking ahead, we may yet see further uplifts in interest rates, both as a result of rising money costs and the use of ‘rate for risk’ underwriting. Whilst dealer finance is not invulnerable from the broader trends, as Powell mentions, historically it is unsecured lending, which includes personal loans, that is hit harder than secured lending.

The growing concern is the reported rise in arrears, especially while interest rates are at historically low levels. Base Rates may be at their highest level since 2009, but in January 2008 they were at 5.5% and had previously been far higher. With a generation of borrowers, and some motor retailers, who have known nothing except sub 1% Base Rates, any increase in funding costs could be very damaging for consumers. In these circumstances, the Bank of England would call for lending restraint which represents a controlled way of slowing the supply of credit, rather than relying upon interest rates alone.

There is however no immediate sign of a further Base Rate rise. The latest rate rise accompanied the quarterly Inflation Report, which showed that despite the rise, the market outlook was for Base Rates to increase at a slower rate than expected over the next three years. The critical issue, therefore, may be tighter underwriting. Powell concludes;

“Our analysis suggests that for many, credit will be harder to come by and more expensive; with unsecured borrowing facing a bigger impact. Acceptance levels for dealer finance on an ‘across-the-board’ basis have always been higher than for personal loans, and whilst not immune from higher costs and tighter underwriting, this could become of increasing value to dealers, especially in used car sales where dealer finance penetration is lower than for new car finance. It could benefit dealers and finance companies to make the availability of dealer finance more apparent to consumers.”