After 30 months of declining sales, car industry banks on relaxed lending criteria

After 30 months of declining sales, car industry banks on relaxed lending criteria

New car sales have passed a grim milestone, but the industry is hopeful the government’s relaxing of lending criteria could help turn their fortunes.

For 30 straight months, sales of new cars have been on the decline. 

September’s figures helped solidify the already clear trend. About 68,985 new vehicles were sold, according to the Federal Chamber of Automotive Industries (FCAI) -- a drop of 21.8 per cent compared to the same period a year earlier.

The weakened demand for new cars could present an opportunity for shoppers still in the market, shifting bargaining power away from dealers and towards them, especially as used car prices have ballooned since the dawn of the pandemic. 

Changes could turn the tide 

Momentum in car sales could turn as coronavirus restrictions are relaxed and red tape is cut, Tony Weber said, chief executive of FCAI.

“We are seeing COVID-19 health restrictions across Australia, and particularly in metropolitan Melbourne, continue to ease,” Mr Weber said.

Victoria’s second lockdown had a notable impact on new car sales. The state recorded 10,477 vehicle sales in September, a drop of 57.7 compared to the same month a year earlier. 

Some states showed growth -- including the ACT, Northern Territory and Western Australia -- but the gains weren’t enough to clot the bleeding.

The 30 months of declining car sales was attributed to natural disasters, unfavourable exchange rates and economic uncertainty, Mr Weber said. 

Scrapped responsible lending obligations could offer a lifeline

Treasurer Josh Frydenberg announced the rules requiring banks to make sure a person can afford to repay their credit could be scrapped in controversial changes intended to make borrowing money easier. 
 
“The removal of responsible lending obligations (RLO) substantially will cut red tape and improve consumer outcomes,” Mr Frydenberg said in an op-ed.

“It will restore balance to the system after 10 years of regulatory creep that has seen the pendulum swing too far away from borrower beware to lender beware.”

The change could not come at a better time for the embattled Australian new vehicle market, Mr Weber said.

“Freeing up restrictions around financial lending will act as a stimulus for Australian industry,” Mr Weber said.

“As we strive to recover from the COVID-19 pandemic, a more efficient flow of credit to consumers and small business will be a strong stimulant to the economy.

“This is particularly true of the automotive sector in Australia, which has recorded some of its lowest sales ever during 2020.”

Responsible lending obligations (RLO), introduced after the GFC, prohibit financial institutions from selling, suggesting or helping a borrower sign a credit contract if the product is “unsuitable” for them, according to the Australian Securities and Investment Commission (ASIC).

They place the obligation on banks to inquire, verify and assess a customer’s financial situation before granting them a credit card, a personal loan or a mortgage, among other kinds of credit.

The announcement to scrap the safeguard was widely condemned by consumer groups and hailed by businesses.

As new car sales stall, used car prices surge

Used car values jumped by 25 per cent since the beginning of the year, according to Moody’s Analytics Price Index, spurred by a drop in supply, a lift in demand and the lockdowns instituted to contain the COVID-19 pandemic.

SUV prices surged by 32 per cent over the previous year, bolstering the rise in used car values, while passenger cars increased by 23 per cent.

The COVID-19 pandemic has seen people move away from public transport, Michael Brisson said, a senior economist and associate director at Moody’s Analytics.

“There has been a shift towards personal transportation in place of ride-share services, public transportation, and air travel,” he said. 

“This change in preference has been in response to fear of contracting the virus or, in some cases, not wanting to deal with the hassles of increased precautions.”

 

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Learn more about car loans

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

What is resale value?

The resale value is the price you could realistically charge if you were to sell your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

How much is my car worth?

If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.

Your car’s worth can depend upon various aspects, including:

  • Age
  • Condition
  • Model and make

A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.

Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.

How much can I get towards a new car as a single parent?

It really depends on your financial circumstances as to how much a lender will grant you towards a new car as a single parent. With most lenders, the smaller the loan you apply for, the higher your chances are of approval, so getting a cheaper car or adding some savings of your own, may be a valid option if you are struggling for approval on a car loan.

How much can I get towards a new car as a single parent?

It really depends on your financial circumstances as to how much a lender will grant you towards a new car as a single parent. With most lenders, the smaller the loan you apply for, the higher your chances are of approval, so getting a cheaper car or adding some savings of your own, may be a valid option if you are struggling for approval on a car loan.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

Can I get a car loan with bad credit?

Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.

You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.

If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.

What is depreciation?

Depreciation is the reduction in the value of your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.

What is a bad credit car loan?

A bad credit car loan is a car loan for borrowers who have ‘bad credit’ or a bad credit history.

Some lenders refuse to offer bad credit car loans, because they believe there is an excessive risk that bad credit borrowers will not repay their loans. However, other lenders are willing to provide bad credit car loans.

Generally, these lenders charge higher interest rates for bad credit car loans than ‘prime’ car loans, reflecting the higher level of risk. Bad credit car loans may also have higher fees than prime car loans.

However, the big advantage of a bad credit car loan is that it allows borrowers with bad credit to access finance. Another advantage is that it could help bad credit borrowers improve their credit rating, assuming they make all their repayments on time.

I’ve been denied a car loan before; can I still get car finance?

Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.

The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.

The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.

Who provides bad credit car loans?

Lenders that provide bad credit car loans tend to be smaller challenger lenders rather than the bigger banks.

Bad credit car loans are a niche product. The bigger banks tend to focus on mainstream car loan finance for borrowers with better credit histories. That’s why smaller lenders tend to be the ones that provide bad credit car loans.

Bad credit car loans can have high interest rates and fees, so it’s important to compare options before submitting an application.

What is an LVR?

The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.