Car-makers are opening their own finance arms offering attractive rates to prospective buyers

IT HAS become something of a grim recessionary routine for motor dealers. A car is chosen, the colour and optional extras agreed and then a final price is hammered out. The first blow comes if there’s a trade-in car involved: the valuation invariably is lower than the customer expects. Then comes what once was the silver lining for the salesman’s commission, but has increasingly become the deal-breaker: securing finance.

Since the onset of the recession, several finance houses noted in the past for providing car loans during the boom years are no longer in the market. Last year GE Money, Friends First and Lombard Ireland all left motor finance, followed this year by Bank of Scotland Ireland.

Permanent TSB are now the major force, with the two main banks, AIB and Bank of Ireland. The credit unions are also a regular port of call for private car buyers. While these remain active, anecdotal stories suggest the criteria have become much tighter and it helps if you already have a good relationship with the lender in question.

Last year, as the motor sector pushed for the introduction of a scrappage scheme, a report on the sector by Dr Peter Bacon stated: “The banks curtailed funding to the industry in late 2008, resulting in the industry not having sufficient funds to enable normal trading, and the consequent inability to accept trade-ins in early 2009.”

At the time the Society of the Irish Motor Industry (Simi) warned that “obtaining reasonable financial terms is a huge problem at present for business funding and for consumer purchases”.

Clearly, the car firms are unhappy to see their business suffer because of outside problems.

In the boom years dealers made sales commission not only on the car, but also from selling the car finance package for an approved lender.

It was a lucrative business, and it has of course shrunk significantly.

One large dealer group claims 66 per cent of all sales in 2007 were financed by loans organised through the dealership with its favoured lending institution. By last year that had fallen to 44 per cent and from January to October of this year that had fallen to just 26 per cent of all its car sales. That means the majority of its clients must find their own finance.

The percentage drop is bad enough, but it also needs to be put in the context of a dramatic drop in new car sales between 2007 and this year as well. It’s a reduced percentage of a much reduced total.

BMW figures show that in 2008 it saw the number of its customers rejected for finance rise from 24 per cent to 53 per cent in just nine months.

Clearly it wasn’t going to sit idly by and watch sales collapse because of banking problems. It had a card up its sleeve – or rather a bulging wallet. For all the turmoil among the US car giants at the turn of the recession, many of their European counterparts remain relatively cash rich. This has allowed them to create their own banks and finance arms, which have gradually moved into the commercial markets in several countries.

BMW is the latest to open its own finance arm here, offering in-house hire purchase and leasing deals to customers of the brand’s 12 Irish dealers. It joins VW Bank, which opened here in October 2009, and several other established finance arms from firms like Ford, whose credit arm has been lending to Irish customers through its dealers since the late 1970s.

According to Philip Kerry, managing director of BMW Financial Services Ireland: “With the decreased availability of consumer credit and the disappearance of many former motor finance companies, this is the right time for us to be making this investment.”

The financial clout of these car firms cannot be taken for granted. VW Bank is offering in-dealer credit facilities to customers of its Audi, Volkswagen, Skoda and Seat brands. While rates vary between the brands, it has adopted an aggressive rate of 5.9 per cent APR on all VW models and 4.9 per cent on selected Skodas and Seats. That’s significantly lower than the 8 per cent-plus charged by many competitor finance houses.

At BMW, Kerry says the firm already operates its finance arm in over 40 countries with a loan book value at present of €67 billion.

It’s also introducing a subsidiary finance operation to Ireland, Alphera Finance, which will offer customer finance to dealers outside the BMW network. This will pitch it directly against the likes of Permanent TSB and the remaining lending institutions.

While most loans from the car firm finance arms will be in the form of hire purchase agreements, they are also seeking to expand on personal contract purchasing (PCP) deals, which are popular elsewhere in Europe. These are effectively private leasing deals that involve customers paying an initial deposit of €3,000 or so and then monthly payments over three years before either handing back the car and taking out another contract on a new one, or buying out the rest of the car at the agreed value.

“The costs reflect the likely depreciation during ownership and means that owners don’t have finance tied up in the car,” explained Adam Chamberlain, VW’s head of sales and marketing in Ireland at the launch of the firm’s latest PCP deals last month.

With another major car brand preparing to launch an Irish finance arm in the new year, the motor sector is taking a proactive approach to the credit squeeze.

In a business where credit is the lifeblood of sales, the traditional financial institutions are facing competition from dedicated lenders who are not prepared to wait until the banks sort themselves out.