Wednesday, August 20, 2008
Rate for Risk
1998. Personal lenders such as Egg and First Direct incepted a policy of ‘rate for risk’, the impact to the retail car buyer was fairly substantial. This policy, ratified by the OFT, bent the rules of the Consumer Credit Act to almost breaking point in relation to advertising of personal loan rates and terms, and it didn’t take too long for the big banking names to follow suit.
The lenders could advertise their ‘best rate’, which would be used in all their hard and soft copy marketing. Customers, on application would be told that their loan had been agreed, but with a slightly higher repayment based on a rate for risk lending policy.
Customers, feeling obliged to continue after the application process and loan approval, and not wanting to ‘jeopardise their relationship with the bank’, would roll over and accept the rate chip without question. Often the revised rate would not be conveyed to the customer until the ‘documentation’ arrived a few days after the balance had been spent or committed. Clever.
Thus began a rate war which we in the Motor Trade could not begin to compete with, due to our doc. fees, admin fees, option to purchase fees, retrospective Volume Bonuses and a whole host of other financial knobs and twiddly bits.
The Direct Lenders have had it away for almost a decade, but now it is time we took that business back. Rate for risk pricing is still around, but lenders operating under the new regime of compliant reporting have to advertise a fair market rate, blended from a sample of deals written within a specified period. This mechanism is far from perfect, but the OFT has had enough and is clamping down on what it sees as unfair market manipulation.
The FSA is also taking a keen interest in some of these practices, under the basic tenet of ‘treating customers fairly’, and I expect there will be an announcement of a hefty fine of a large operator in this field to come soon.
So where does this leave us? Well, we still can’t truly compete in an APR war, but the customer is with you so far, so ask the questions that count, be interested in them, listen to their answers, and be prepared to be tenacious.
During a mystery shopping exercise recently undertaken for an FSA authorised dealer group, I found that the sales process for moving the metal was superb, but as soon as we got on to the financial aspects, all the good work went into meltdown. The results were as follows;
Cars Bought – 16
F&I Offered – 7
F&I asked for – 9
HP offered – 16 (eventually)
PCP offered – 2
Leasing discussed - 0
Insurances offered – 0*
*Gap, CPI, MBi, Motor
OK, so this doesn’t look too bad on the surface, but of the 7 that offered Finance to me for the purchase, 4 of those offered it almost apologetically, and two of those actually told me that the Banks would be cheaper!
If I went to see my GP for some ailment, and without any discussion or qualification on her behalf she wrote me a prescription for penicillin, I would have little faith in her abilities – but this is almost exactly what we do for a high proportion of our customers when it comes to selecting and quoting funding products.
We have so many tools in our toolbox to offer to customers, not just HP. Customers buy from us because we are specialists in our industry, but we still need to prove our expertise. We need to understand the products we sell, and the process behind those products. If we prove ourselves as knowledgeable, and we use all the funding products we have at our disposal, then our customers have faith and confidence in our words and recommendations, the process to buy becomes much easier, and retained deal profit is exactly that, retained.
If you would like some help for your sales teams to make the most of the current market conditions, please drop us an email, or give us a call, we would be delighted to help you reduce the big Banks net profits a little.
DATED: 20.08.08
FEED: PTL
The lenders could advertise their ‘best rate’, which would be used in all their hard and soft copy marketing. Customers, on application would be told that their loan had been agreed, but with a slightly higher repayment based on a rate for risk lending policy.
Customers, feeling obliged to continue after the application process and loan approval, and not wanting to ‘jeopardise their relationship with the bank’, would roll over and accept the rate chip without question. Often the revised rate would not be conveyed to the customer until the ‘documentation’ arrived a few days after the balance had been spent or committed. Clever.
Thus began a rate war which we in the Motor Trade could not begin to compete with, due to our doc. fees, admin fees, option to purchase fees, retrospective Volume Bonuses and a whole host of other financial knobs and twiddly bits.
The Direct Lenders have had it away for almost a decade, but now it is time we took that business back. Rate for risk pricing is still around, but lenders operating under the new regime of compliant reporting have to advertise a fair market rate, blended from a sample of deals written within a specified period. This mechanism is far from perfect, but the OFT has had enough and is clamping down on what it sees as unfair market manipulation.
The FSA is also taking a keen interest in some of these practices, under the basic tenet of ‘treating customers fairly’, and I expect there will be an announcement of a hefty fine of a large operator in this field to come soon.
So where does this leave us? Well, we still can’t truly compete in an APR war, but the customer is with you so far, so ask the questions that count, be interested in them, listen to their answers, and be prepared to be tenacious.
During a mystery shopping exercise recently undertaken for an FSA authorised dealer group, I found that the sales process for moving the metal was superb, but as soon as we got on to the financial aspects, all the good work went into meltdown. The results were as follows;
Cars Bought – 16
F&I Offered – 7
F&I asked for – 9
HP offered – 16 (eventually)
PCP offered – 2
Leasing discussed - 0
Insurances offered – 0*
*Gap, CPI, MBi, Motor
OK, so this doesn’t look too bad on the surface, but of the 7 that offered Finance to me for the purchase, 4 of those offered it almost apologetically, and two of those actually told me that the Banks would be cheaper!
If I went to see my GP for some ailment, and without any discussion or qualification on her behalf she wrote me a prescription for penicillin, I would have little faith in her abilities – but this is almost exactly what we do for a high proportion of our customers when it comes to selecting and quoting funding products.
We have so many tools in our toolbox to offer to customers, not just HP. Customers buy from us because we are specialists in our industry, but we still need to prove our expertise. We need to understand the products we sell, and the process behind those products. If we prove ourselves as knowledgeable, and we use all the funding products we have at our disposal, then our customers have faith and confidence in our words and recommendations, the process to buy becomes much easier, and retained deal profit is exactly that, retained.
If you would like some help for your sales teams to make the most of the current market conditions, please drop us an email, or give us a call, we would be delighted to help you reduce the big Banks net profits a little.
DATED: 20.08.08
FEED: PTL
