The motor finance and leasing market is moving towards a ‘finance first’ approach, whereby affordability is determined for the customer ahead of the actual point of purchase. But is it truly part of the DNA?

Macroeconomic conditions are creating a challenging period for the motor finance and leasing sector, which is still in recovery following the pandemic. Interest and APR rates are rising, and with higher insurance, fuel and energy prices, car ownership is more costly.

Nevertheless, the outlook is more positive, with supply chain disruption easing, vehicle prices trending down and inflation levels improving. Demand for new vehicles is still there, but renewal conversations for like-for-like replacement cars that cost far more a month are becoming difficult. Many customers are downsizing to smaller and less prestigious vehicles. The motor finance journey is evolving at pace, adapting to rising expectations of customer experience and digital innovation, as well as shifting attitudes towards ownership.

Analysis by The Car Expert found that 92% of new cars are purchased using finance agreements. Yet, perhaps counter-intuitively, the existing motor finance and leasing customer journey typically assumes that a product choice has been made before applying finance to it. We see validation of this with the overwhelming majority of buyers (91%) wanting to find finance options on their own terms, before they arrive at the dealership – according to consumer research by Close Brothers Motor Finance.

So, does (and how can) the motor finance and leasing market truly facilitate this?

Thinking of financing early on

A shift is gradually occurring within the market. Progressive providers are taking a ‘finance first’ approach that establishes affordability early in the customer journey, enabling consumers to arrange their finance before they choose their vehicle, rather than at the point of sale. A simple review of motoring brand websites shows this.

This is significant, because finance has historically been perceived as an end-of-process step, increasing pressure on the customer regarding what they can afford. And car brands are historically product-led, rather than by finance or affordability.

Any yet, according to the FCA, only 30% of motor finance firms it reviewed sufficiently explored customers’ specific circumstances, which meant repayment agreements were often unsustainable. And more than one in three people, polled by Motorpoint in a survey of 2,000 UK drivers with cars over 10 years old, said a lack of awareness of car finance options had seen them hang on to their car rather than upgrade it.

What we still often see from car manufacturers is the promotion of a product and then finance attached to it. So, it’s often still led by product first, rather than affordability first – which could actually direct and better inform the customer’s purchasing decision at the outset.

The need for features and flexibility

Affordability is in flux and the options for owning or accessing a car have become more varied and complex to navigate.

According to Mintel, consumers engaged in the car finance market are seeking features that will support them in times of financial hardship. Twenty percent of under-45s stated that payment deferral would make them choose one car finance product over another.

And with pandemic-influenced lifestyle changes, economic uncertainty and the cost-of-living crisis, coupled with increasing expectations of customer empowerment and experience, consumers value flexibility in their car finance products more highly.

Understandably, customers want to enjoy the experience of buying a car. They want to spend the amount of time in the dealership that suits them and don’t want to feel pressured or anxious about affordability and negotiations.

The initial trend for establishing affordability early in the customer journey is shaping expectations for greater levels of control and flexibility on demand – and is indeed extending to car finance management. For example, research by Sogo published in February 2023 indicates that short-term leases are now preferred to longer contracts by 37% of drivers because of the financial flexibility offered. And consumers are increasingly looking for the ability to adjust and update aspects of their finance arrangements, such as those related to contracted mileage or to obtain a settlement quote.

The right (digital) tools for the job

Digital innovation and self-service tools can help give the consumer the control they crave.

For example, Specialist Motor Finance and ALPHERA provide self-service platforms enabling instant, anytime access to financial agreements, with the option to amend details and manage end-offer options. Elsewhere, Ford Credit is trialling solutions aimed at offering customers greater flexibility, including allowing them to change their mileage allowance should their situation or needs change. Similarly, following the rapid increase in low-mileage lease contracts, Nissan has launched a new leasing option called SignatureFlex, which gives lessees the ability to add miles if they are approaching their limit.

Financial providers must recognise the significant changes in lifestyle and work which mean that current contracts can feel inflexible and outdated. Thus, the need for digital innovation and tools that put the customer in control and provide easy ways of amending finance.

There’s a real opportunity here for the motor finance and leasing industry to develop ultraconvenient, flexible ways for consumers to manage their needs. Reducing financial worry and avoiding overage penalties; providing a smooth and empathic experience, helping customers with finance agreement in principle and in advance of purchase; agreeing affordability in advance to manage expectations and help to reduce future debt challenges. For example, such tools as ‘affordability calculators’, are little in evidence at the outset on the customer journey with motor manufacturers. If right now, we were to take a snapshot of the leading manufacturer websites, would we in fact see affordability calculators front and centre – or anywhere?

Something for providers to consider is offering a more cohesive customer support team, one that has the necessary vehicle and brand information, but also the financial permissions required to address any questions in that area. Generative AI-based conversational agents could be offered to digitise and automate a large part of customer support.

And so, the industry could leverage how most new cars are purchased using finance agreements and change the perception that finance is just an end-of-process step, instead making car finance affordability-led right from the beginning. This would also be a great opportunity to engage with the customer from the outset with supportive messaging.

Ultimately, a car is most people’s second biggest purchase. When we go to buy a house (which is, of course, the first), our mortgage is typically agreed in advance – ‘approval in principle’. So why shouldn’t the motor industry move more towards ‘lease/finance approved in principle’ before its customers go vehicle shopping?

We’ve commissioned a series of reports – focusing on motor finance and leasing along with other industries – to help you understand the challenges of the future customer in terms of how you can best connect, support and transform their experience to gain competitive advantage.

Written by

Harish Naidu

Harish Naidu

Business Development Director at Capita

He is a transformation executive with varied experience across Europe, US and India, with a track record in designing solutions, executing and leading business transformation programs across financial services, automotive and equipment finance and consumer packaged goods.

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