SECTOR REPORT: CAR FINANCE
Why are so many brokers thinking about writing car loans? In this sector report, we take a look at the auto lending space and how demand has opened new opportunities for brokers and lenders to take advantage of a rise in consumer car finance.
Car finance and auto lending have been booming. Ever since the initial shock of COVID-19 eased, demand for cars has been at record high levels. Prices for vehicles ratcheted up as cars became scarce, which was frustrated by labour shortages and manufacturing disruptions spurred on by the onset of the pandemic particularly when it came to the distribution of semiconductor chips.
The increase in car prices led to a corresponding lift in car loan volumes. According to official stats from the Australian Bureau of Statistics (ABS), new loans for the purchase of road vehicles rocketed up to a near-record high of $1.31 billion in August 2022 (second only to February 2015, when loans totalled $1.5 billion) and have remained over $1 billion a month ever since. The most recent figures — for November 2022 — showed that around $1.16 billion of new personal fixed-term loans were for the purchase of road vehicles.
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The drive towards auto lending
But, as is often the case, when something is in short supply, it seems to become more popular.
Lenders have been quick to diversify their product ranges to include more asset financing options in their offerings. Several lenders over 2022 added new products and offerings for automotive lending in particular, which resulted in a boon for lenders’ portfolios over the year.
For example, non-bank lender Firstmac introduced a variable-rate car loan for its customers in early 2022 and offered discounted interest rates for those buying electric or hybrid vehicles.
It came as part of a move to bolster its vehicle finance presence, which it has been ramping up in recent years. For example, in 2020, the lender acquired car loan brokerage CarLoans.com.au and car-buying service Georgie from ASX-listed vehicle finance and leasing company Eclipx Group and then recruited car loan business development manager (BDM), Tom Moody, as its inaugural national sales manager for auto lending in October.
Firstmac’s managing director, Kim Cannon, said at the time that the moves would continue to bolster growth in the car lending market after it wrote “record volumes throughout 2022”. It recently revealed that it had grown its auto finance business portfolio to $600 million.
Furthermore, fintech lender Plenti grew its loan portfolio to $1.67 billion by the end of December 2022, with the automotive part of its book growing 60 per cent on the year, to $958 million.
In the last quarter alone, it originated $142 million in automotive loans, largely driven by the broker channel.
‘Green’ products taking focus
A growing theme in the auto lending space and car purchases, more generally, is for electric vehicles. After the devastation wrought on by floods (following on from drought and bushfires), the ever-present and irrevocable threat of climate change took particular focus throughout 2022.
Historically, Australia has been significantly behind when it comes to electric vehicles (EVs) with only 2 per cent of new vehicle sales being for this type of car. Overall, low-emissions vehicles are nearly five times lower than the global average.
Part of the issue has been a lack of appropriate infrastructure to charge these vehicles (with Australia’s vast landmass requiring many charging stations) while another has been a backlog in supply.
But uptake is increasing. The year 2022 marked a new record for EV uptake in Australia, according to the Federal Chamber of Automotive Industries. Just over 3 per cent of total new car sales were electric last year and Australia sold nearly double the amount of EVs than it did in 2021 (at around 33,000, according to the Federal Chamber of Automotive Industries). Car manufacturers also reported strong demand. Tesla topped the charts for EV sales and Volvo noted that a record 13.8 per cent (1,474) of Volvo cars sold in Australia were electric in 2022.
This will likely increase as the government’s new incentive plan comes into being. As part of Australia’s ambition to reach net-zero emissions by 2050 (and achieve its emissions reduction target of 43 per cent below 2005 levels by the year 2030), the government has been working on a National Electric Vehicle Strategy and electric car discount.
While the strategy is still being shaped (a consultation on the strategy closed in October), “at the heart of the national strategy will be a plan to improve affordability and choice for consumers by growing the Australian EV market,” Minister for Climate Change and Energy, Chris Bowen, said.
“This is a genuine consultation to inform the right policy settings so we can see more affordable electric vehicles on our roads.”
A key part of affordability is having affordable finance to buy them. Speaking to The Adviser in August, Firstmac CFO, James Austin, commented on the rise of the lender’s green loans uptake: “In 2018, we made about 100 Green Car Loans, but by 2021, this had increased to more than 600 loans. This is despite the rules being tightened to include only hybrid or electric vehicles.
“The increase in the number of loans reflects the rapid rise in popularity of hybrid and electric vehicles, which is also obvious on the streets.”
However, it’s not just the non-bank lenders that have ventured into the green auto loan sphere; Westpac announced that it would be offering reduced loans for borrowers intending to purchase environmentally sound vehicles in May 2022.
Westpac chief executive, consumer, and business banking, Chris de Bruin, said at the time that the major bank was aware that cost was one of the biggest barriers to hybrid and electric vehicle uptake and this initiative could “help more customers transition to a greener vehicle”.
“Given the recent increase in petrol prices, electric and hybrid vehicles appeal to the environmentally conscious, and the financially conscious too,” Mr de Bruin said.
“We expect demand for these vehicles will continue to rise, with many Australians already planning to make the change.”
In a high-demand market, more and more borrowers are now turning to brokers for help accessing car loans. Speaking to The Adviser about the current trends in the car financing space, director and finance broker at Funnd Finance, Devon McNabb, said that this had been led by concerns over increasing rates over the past 12 months.
“Brokers offer a one stop shop in comparing all the major lenders with the lowest rates in the country,” Mr McNabb said.
“Another trend we have noticed is an increase in private sale vehicle purchases due to dealer stock shortages, however stock now appears to be returning to normal levels.”
On the outlook for car financing for 2023, Mr McNabb commented: “Demand has currently remained strong despite the Reserve Bank’s lifts [in the cash rate]. As dealer stock levels return we will see manufacturers getting more competitive.
“This will also cause used car prices to decrease as interest rates are also expected to decrease over the second half of the year.”
For brokers not yet writing car loans, now might be the time to put the pedal to the metal and start.
According to Mr McNabb, a broker specialising in car finance, there are three top tips to writing car finance.
The director and finance broker at Funnd Finance said brokers need to firstly ensure they obtain accreditations with the relevant top lenders for car finance including both banks and non-banks.
Secondly, he flagged that speed is necessary: “Car finance moves quickly so get results for your clients yesterday.”
Lastly, the broker highlighted that ongoing customer service after settlement was also important (particularly as Australians are believed to buy a new car every five to six years on average), so applying the correct strategies to retain business (and not just win it) was key.
[Related: Brokers help drive surge in Plenti’s lending]
