Why is it that people who are classed as subprime struggle to get a personal loan, but can be approved for car finance by numerous companies, surely lending money is all the same?
The answer is quite straightforward, but maybe confusing to those who are not in the subprime finance business. In essence it boils down to a simple case of security and potential loss. If someone defaults on a personal loan, there is no real potential of recovery of any of the funds in a swift period of time.
For instance, customer A defaults on a personal loan, apart from taking them to court and trying to recover income from them, there is no alternative and if the customer has a genuine reason for default, it’s unlikely that you would obtain a judgement for anything meaningful in terms of monthly instalments. Therefore your loss is total – advance, minus payments made and the derisory judgement the court makes in a repayment schedule; assuming that the customer actually keeps to it. In this scenario, your return will drip feed in over many years and without doubt you will have to chase the customer for the payments as well. All in all, not a good position to be in if you’re a lender, this is why loans with no security are few and far between in the subprime world.
Let’s now take the subprime car loan. First of all, the lender knows that there is an asset they can repossess and sell in the event of default, so immediately were ahead of a personal loan in terms of loss. Secondly, we know that the vehicle is more than likely a critical requirement for the customer, few people want to get public transport and nowadays in general we all prefer to travel by car. This means that the customer has a reason to pay for the loan as well, so were looking good now.
Not only do we have some immediate return in the event of default, we also know there is a need for the customer to pay for the loan, rather than the basic obligation of a finance agreement.
So we now need to analyse what the loss situation is going to be. The loss is in direct proportion to the amount you lend on the vehicle relative to resale/auction value. Lending someone £10,000 on a car loan that’s worth £600 at an auction is dumb and is as good as writing a personal loan. Sure, cars still depreciate; however, you’re betting that the instalments made will help offset this problem.
A standard market value in the subprime sector is to lend retail value (mileage adjusted), using an agreed independent and updated valuation source (Glass Guide or CAP) in the hope you will obtain trade price at the auctions. For those not in the “know” circa 120-125% of trade represents the retail amount, however, prices do vary.
Operating in this manner, the dealership or seller makes enough profit out of the metal for it to be worth their while and the finance company “ideally” has an asset that can realise a good amount in the event of repossession and resale at auction. This will ensure that the loss isn’t total and those customers who pay will pay for those that don’t.
The only security superior to that of a vehicle, is obviously the security of a charge on the property.
Thursday 17 April 2008
Tuesday 15 April 2008
Credit rating - how it works
Most if not all finance companies will register your loan with a credit reference agency, once you have taken the loan out. It doesn’t matter if it’s for a personal loan, hire purchase, car finance or secured loan; they are all registered on the data files and sent off.
Each month the finance company needs to send the records back to the credit reference agency and update the current status of car finance accounts they have on file. This is done electronically and usually fazed in batches over the month, if it’s a large car finance entity; monthly if it’s a smaller company.
When you fall past due, it will not show immediately that you are one month in arrears. You will have approximately three weeks before you run the risk of your credit file showing a full one payment in arrears, or as the credit reference agency states “One down”. Certainly after four weeks you will at the critical point of the account showing a level of deterioration. Obviously once it shows “one down” you will need to bring the account up to date as soon as possible otherwise your credit file will be impaired. If you’re looking to obtain things like credit for vehicle or van finance you will immediately struggle, this is because the underwriters will think that you are currently experiencing credit problems as your account has just gone one down and probably reject your car finance application.
Each month the finance company needs to send the records back to the credit reference agency and update the current status of car finance accounts they have on file. This is done electronically and usually fazed in batches over the month, if it’s a large car finance entity; monthly if it’s a smaller company.
When you fall past due, it will not show immediately that you are one month in arrears. You will have approximately three weeks before you run the risk of your credit file showing a full one payment in arrears, or as the credit reference agency states “One down”. Certainly after four weeks you will at the critical point of the account showing a level of deterioration. Obviously once it shows “one down” you will need to bring the account up to date as soon as possible otherwise your credit file will be impaired. If you’re looking to obtain things like credit for vehicle or van finance you will immediately struggle, this is because the underwriters will think that you are currently experiencing credit problems as your account has just gone one down and probably reject your car finance application.
Tuesday 8 April 2008
Car finance and the need to change
In this day and age it’s near impossible to purchase a vehicle without obtaining car finance. Most if not everyone wants a new shining vehicle and if they cannot obtain a new one a used one will be a good alternative.
It seems that people have a change cycle of approximately every two to three years; this appears to be the ideal time for the need to change. This is quite odd as it appears that most people would actually prefer to change their car and obtain car finance again for the next vehicle, rather than paying off the total loan before buying another. This can be the result of some socio-economic issues. For instance, is it that the neighbour has recently changed their vehicle, or perhaps they have become bored of the existing one and see the new models released on television adverts and this triggers the compulsion to change it.
My opinion is that it has something to do with “keeping up with the Jones’s” syndrome. The need to appear successful and affluent compared to your peers is what drives many to change. Why have that old vehicle sitting in the drive for so many years, when you can obtain a new one by just changing your car finance deal.
The other thing to keep in mind are the people who just need to have the latest model, they are “into” their vehicles and read all the publications and reviews and then a deep seated urge to get it drives them to change. This is followed by a few visits to the local dealers to see what their missing, a sort of intel mission. If they then find the vehicle is just what they want then the compulsion to buy becomes almost unstoppable then they start to organise the car finance facilities to make it happen.
Car finance rates will not stop this person from buying as the need to buy will now outweigh the rates on the car finance and as long as they can get it organised there happy. Car finance is available to consumers here.
It seems that people have a change cycle of approximately every two to three years; this appears to be the ideal time for the need to change. This is quite odd as it appears that most people would actually prefer to change their car and obtain car finance again for the next vehicle, rather than paying off the total loan before buying another. This can be the result of some socio-economic issues. For instance, is it that the neighbour has recently changed their vehicle, or perhaps they have become bored of the existing one and see the new models released on television adverts and this triggers the compulsion to change it.
My opinion is that it has something to do with “keeping up with the Jones’s” syndrome. The need to appear successful and affluent compared to your peers is what drives many to change. Why have that old vehicle sitting in the drive for so many years, when you can obtain a new one by just changing your car finance deal.
The other thing to keep in mind are the people who just need to have the latest model, they are “into” their vehicles and read all the publications and reviews and then a deep seated urge to get it drives them to change. This is followed by a few visits to the local dealers to see what their missing, a sort of intel mission. If they then find the vehicle is just what they want then the compulsion to buy becomes almost unstoppable then they start to organise the car finance facilities to make it happen.
Car finance rates will not stop this person from buying as the need to buy will now outweigh the rates on the car finance and as long as they can get it organised there happy. Car finance is available to consumers here.
Wednesday 2 April 2008
Collecting and the objectives
Yesterdays post was about your reaction to taking that first call because your car finance loan was in arrears. This one is a bit of insight from the collector who will be calling you.
First off, your details are going to be in the auto dialer at the car finance company, I mentioned this yesterday. Now this person will usually be in a call center of the car finance company, have targets and hate his or her job and be speaking to people trying to weasel out of paying for their car loan all day. Not a good start for you eh?
So first off the call is placed by the car finance company auto dialer, then your details will appear on their screen when you answer the call. If you don’t answer the call then it will usually try the other numbers on file for you in quick succession, each waiting for the call to be answered or not as the case may be. As soon as the call is live your details will appear on the screen of the caller. Sometimes, odd things happen here, for instance if the car finance organisation use a predictive dialer and the call center is busy, you might actually not get anybody on the line immediately. There's a marked delay between you answering the call and somebody actually talking to you, then you know their busy!
The car finance employee calling you doesn’t have enough time to read all the comments on your file, if any. This is why they always seem to have the same introduction - security questions, statement of balance and can you pay the balance now. This is so you have to take time to respond which enables a sort of catch-up period for the collector to look at some key details while your answering them.
So, the collector’s objective - Well it used to be something like:
1. What’s the problem for the payment arrears.
2. What’s the solution to stop this happening again?
3. Can they pay now and clear the arrears on your car finance.
This is usually why you get asked why you haven't made the payment to your car finance. There’s some real obvious NO NO's here, the collector isn't looking for: Uhm, couldn’t be bothered about my car finance, I'm busy call me back later type of replies, there looking to get you off their queue. There’s nothing personal about the call, you will be one of perhaps hundreds of people this person is going to have to try and speak to about their car finance before they can go home, or more than likely, go to the pub to release the stress of all the car finance people in arrears.
So the car finance collector needs a result and you need a result. You do need to agree and stick with an arrangement to pay. Getting abusive or argumentative will get you nowhere. Your offhand comments will be noted and the next time you are called, you can bet your house on the fact that you will get a harder time if you’re not going to at least sound responsive to this person. You need to at least give the impression that you care about the loan and that you do want to resolve it, this way there’s a note on your account about how receptive you were and how you had a good attitude to sorting the problem out.
The obvious solution to solve the arrears, is to pay on time and if you do forget to pay, you try and get your account back up to date as soon as possible.
First off, your details are going to be in the auto dialer at the car finance company, I mentioned this yesterday. Now this person will usually be in a call center of the car finance company, have targets and hate his or her job and be speaking to people trying to weasel out of paying for their car loan all day. Not a good start for you eh?
So first off the call is placed by the car finance company auto dialer, then your details will appear on their screen when you answer the call. If you don’t answer the call then it will usually try the other numbers on file for you in quick succession, each waiting for the call to be answered or not as the case may be. As soon as the call is live your details will appear on the screen of the caller. Sometimes, odd things happen here, for instance if the car finance organisation use a predictive dialer and the call center is busy, you might actually not get anybody on the line immediately. There's a marked delay between you answering the call and somebody actually talking to you, then you know their busy!
The car finance employee calling you doesn’t have enough time to read all the comments on your file, if any. This is why they always seem to have the same introduction - security questions, statement of balance and can you pay the balance now. This is so you have to take time to respond which enables a sort of catch-up period for the collector to look at some key details while your answering them.
So, the collector’s objective - Well it used to be something like:
1. What’s the problem for the payment arrears.
2. What’s the solution to stop this happening again?
3. Can they pay now and clear the arrears on your car finance.
This is usually why you get asked why you haven't made the payment to your car finance. There’s some real obvious NO NO's here, the collector isn't looking for: Uhm, couldn’t be bothered about my car finance, I'm busy call me back later type of replies, there looking to get you off their queue. There’s nothing personal about the call, you will be one of perhaps hundreds of people this person is going to have to try and speak to about their car finance before they can go home, or more than likely, go to the pub to release the stress of all the car finance people in arrears.
So the car finance collector needs a result and you need a result. You do need to agree and stick with an arrangement to pay. Getting abusive or argumentative will get you nowhere. Your offhand comments will be noted and the next time you are called, you can bet your house on the fact that you will get a harder time if you’re not going to at least sound responsive to this person. You need to at least give the impression that you care about the loan and that you do want to resolve it, this way there’s a note on your account about how receptive you were and how you had a good attitude to sorting the problem out.
The obvious solution to solve the arrears, is to pay on time and if you do forget to pay, you try and get your account back up to date as soon as possible.
Tuesday 1 April 2008
When it all goes bad
Sometimes people get the car finance, look after the vehicle, make a few payments and then decide it’s not a priority anymore. They have loads of other bills to pay and seem to fall back into the trap of "maybe I'll pay it later" syndrome.
The problem here is that if you have obtained the vehicle from a specialist subprime company with car finance, they don't hang around waiting for you to pay when you want.
The car finance account usually falls pass due into a list after a day or at most three days overdue. At this point, the collection machine starts to move into action.
It’s not usual for you to receive a polite reminder in the post, nope that was a thing of the past when your credit rating was good. Now, you will receive a telephone call from the car finance company and put into an auto dialler list so they can get hold of you as soon as possible. Depending on the collection technique of the company, they will try all the known numbers, work, home, mobile etc. They also will not leave just a polite message; usually the car finance will call and if you don’t respond, will diarise the call for later in the day. Don’t forget, this isn’t something they do manually and might forget, this is on an automated system (dialler) so you can be assured that the car finance company will continue to call all the known numbers until they can get hold of you.
So, the best solution is to take the call as soon as possible. You need to respond in a none combative manner and arrange to make the payment as soon as possible.
Your real objective when taking the call is to ensure that the collector "feels" that you are not a problem and it was a mere oversight on your behalf and the car finance problem is now solved. This way you don’t get comments on your file about a bad attitude or offensive behaviour. This is important because if they need to speak to you again, the person calling you reads the notes of the previous call before they talk to you and therefore you don't start with the collector thinking that you are going to be difficult with them.
The problem here is that if you have obtained the vehicle from a specialist subprime company with car finance, they don't hang around waiting for you to pay when you want.
The car finance account usually falls pass due into a list after a day or at most three days overdue. At this point, the collection machine starts to move into action.
It’s not usual for you to receive a polite reminder in the post, nope that was a thing of the past when your credit rating was good. Now, you will receive a telephone call from the car finance company and put into an auto dialler list so they can get hold of you as soon as possible. Depending on the collection technique of the company, they will try all the known numbers, work, home, mobile etc. They also will not leave just a polite message; usually the car finance will call and if you don’t respond, will diarise the call for later in the day. Don’t forget, this isn’t something they do manually and might forget, this is on an automated system (dialler) so you can be assured that the car finance company will continue to call all the known numbers until they can get hold of you.
So, the best solution is to take the call as soon as possible. You need to respond in a none combative manner and arrange to make the payment as soon as possible.
Your real objective when taking the call is to ensure that the collector "feels" that you are not a problem and it was a mere oversight on your behalf and the car finance problem is now solved. This way you don’t get comments on your file about a bad attitude or offensive behaviour. This is important because if they need to speak to you again, the person calling you reads the notes of the previous call before they talk to you and therefore you don't start with the collector thinking that you are going to be difficult with them.
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