Although, as we have explained recently, there are a number of very competitive finance deals on offer at car showrooms across the country at present, as a result of the credit crunch lending criteria for many finance companies have tightened considerably.
A customer with a fairly normal credit rating who maybe has had a late payment or has exceeded his/her overdraft occasionally would probably, in the past, have obtained credit with a fairly decent APR (annualized percentage rate). However that has all changed and dealers are now reporting a massive increase in finance decline rates in their showrooms leading to less cars being sold, thus putting profitability under severe pressure. As we know not only do car dealers earn income from finance and related insurance products, but for some dealer groups they can also earn extra income from what we call volume bonus i.e. a percentage payment based on the amount of money loaned out over an agreed period of time.
The other hardship faced by both customers and dealers is that while some lenders will accept customers with slightly lower credit scores the interest charges can go up dramatically and therefore make the payment unaffordable and again leading to zero business being carried out.
The thing I often find puzzling is the rationale behind this. A customer who has a poorer credit rating and therefore doesn’t qualify for a great headline rate of interest, must payback more of the balance in interest as the rate is much higher, but surely the rate should be more affordable to this type of customer to give them less chance of defaulting on their car repayments and thus potentially having it re-possessed. I can probably guess the answer and so can you, but surely if only the, what we call in the trade, ‘Blue chip’ customers with top credit ratings are being considered for loans as the finance houses look to balance their risk, how will car dealers and manufacturers continue to keep the wheels turning? Additionally how can customers upgrade their older cars for the newer greener examples which the government want us all to do? Yet another muddled, mixed message from the Government; get out of your old, economically unfriendly car and into the newest “greenest” model! What, no one wants your old car? You can’t get credit for a new one? You can’t afford to run the old one because we’re going to tax you off the road and the fuel costs too much? Oh well there’s always the bus!
It looks like someone needs to break the cycle and lenders need to be realistic. As ever in situations like this; when times are good they lend money like drunken sailors to anyone who asks and when there is a downturn they won’t lend it to anyone.
The advice from us is to shop around, look at comparison sites and make your dealer work hard for the sale by offering you the very best rates available. If you want to check your credit rating before you go and see a dealer visit someone like Experian etc, after all knowledge is power and forewarned is forearmed.