Thursday, July 31, 2008
Dealer POS finance is on the rise, but why?
Direct Lenders have a major problem on their hands. New regulation on how they account for and report personal lending is causing them to review their lending criteria, and uplift their anticipated return on investment.
Anybody remember Enron ? The collapse of this energy giant in the US brought about the inception of a piece of compliance called Sarbanes-Oxley, often referred to in the financial world as SarbOx, or SOX
The aim of this work was to ensure that corporate assets and risks were correctly accounted for, removing the ‘flexibility’ that had been applied by the directors of that company, deliberately masking the actual and true state of financial affairs behind the business.
The UK, working within Europe, took key lessons from Enron and SarbOx, and adopted Basel 2. The Basel 2 Accord, now implemented across most of the developed world, presents challenges and opportunities to banks. Technical and complex, it is important to understand its impact on how a loan is priced and what the financial consequences of any change in its application might be.
Here’s the rub, those direct lenders that have been stealing your F&I business over the last few years now have to account for their unsecured, higher risk personal loans, in a totally different way. The decision they have is simple – as they have to account for the high risk nature of each loan (and lets face it, bad debt and non-prime lending is right up there in the headlines at the moment) they either decline personal loan business or write the loan at higher rates to justify & offset their exposure.
Additionally, the LIBOR (London Inter Bank Offered Rate) exchange is very quiet at the moment. This is the exchange that marks both the rate at which banks offer each other money, and the amount which they are putting into the market. Although the LIBOR rate is pretty stable currently, the actual amount of money within the market is vastly reduced from normal throughput – hence our well publicised problems with Northern Rock, the first run on a UK bank in 142 years. Northern Rock were starved of cash, as the LIBOR market flow dried up.
So in summary, the Direct Lenders, owned by the UK Banks, have to charge more for their loans, or decline a larger proportion of personal loan proposals. They would prefer to put more money out to the market with an asset backed security tagged on to reduce their risk, such as a house, boat, caravan or car. The act of having an asset within the loan reduces the potential loss as there is something repossess-able if the borrower doesn’t repay, thus the risk to the lender is reduced, and the yield on the lend is increased.
I wish we could claim that the reason that POS finance is rising was down to the skills, expertise and salesmanship of our dealer teams, but currently the rise we have seen can be directly attributed to the lack of appetite that the Direct Lenders in the UK market have for Personal Loan business
If you would like to really maximise your F&I opportunities and profitability, utilising information like this to gain competitive advantage, please get in touch, we would be delighted to help.
DATED: 31.07.08
FEED: PTL
Anybody remember Enron ? The collapse of this energy giant in the US brought about the inception of a piece of compliance called Sarbanes-Oxley, often referred to in the financial world as SarbOx, or SOX
The aim of this work was to ensure that corporate assets and risks were correctly accounted for, removing the ‘flexibility’ that had been applied by the directors of that company, deliberately masking the actual and true state of financial affairs behind the business.
The UK, working within Europe, took key lessons from Enron and SarbOx, and adopted Basel 2. The Basel 2 Accord, now implemented across most of the developed world, presents challenges and opportunities to banks. Technical and complex, it is important to understand its impact on how a loan is priced and what the financial consequences of any change in its application might be.
Here’s the rub, those direct lenders that have been stealing your F&I business over the last few years now have to account for their unsecured, higher risk personal loans, in a totally different way. The decision they have is simple – as they have to account for the high risk nature of each loan (and lets face it, bad debt and non-prime lending is right up there in the headlines at the moment) they either decline personal loan business or write the loan at higher rates to justify & offset their exposure.
Additionally, the LIBOR (London Inter Bank Offered Rate) exchange is very quiet at the moment. This is the exchange that marks both the rate at which banks offer each other money, and the amount which they are putting into the market. Although the LIBOR rate is pretty stable currently, the actual amount of money within the market is vastly reduced from normal throughput – hence our well publicised problems with Northern Rock, the first run on a UK bank in 142 years. Northern Rock were starved of cash, as the LIBOR market flow dried up.
So in summary, the Direct Lenders, owned by the UK Banks, have to charge more for their loans, or decline a larger proportion of personal loan proposals. They would prefer to put more money out to the market with an asset backed security tagged on to reduce their risk, such as a house, boat, caravan or car. The act of having an asset within the loan reduces the potential loss as there is something repossess-able if the borrower doesn’t repay, thus the risk to the lender is reduced, and the yield on the lend is increased.
I wish we could claim that the reason that POS finance is rising was down to the skills, expertise and salesmanship of our dealer teams, but currently the rise we have seen can be directly attributed to the lack of appetite that the Direct Lenders in the UK market have for Personal Loan business
If you would like to really maximise your F&I opportunities and profitability, utilising information like this to gain competitive advantage, please get in touch, we would be delighted to help.
DATED: 31.07.08
FEED: PTL
