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Automotive financing or auto financing are services that offer financial products and support to further allow people to purchase vehicles without having to make the complete payment in cash. Such an arrangement includes the borrowing of money from financial institutions such as banks, credit unions, and dealers or other informal money lenders.
Of all the sectors that escaped the 2008 financial crisis relatively unscathed, auto lending industry was one of them. The cash strapped borrowers continued to prioritise paying off their cars over their homes and credit cards with a simple logic that one can sleep in the car but cannot drive their house to work.
However, the USD 1.3 trillion industry which has now become 60 % bigger than it was back then, is under severe pressure due to COVID-19. Not only are millions of people being put out of work, but the government is calling for everyone to stay at home to limit the spread of the virus which raises the question of whether borrowers will continue to put their cars above all when money is tight.
In April 2021, Mitsubishi UFJ lease and Finance announced a merger with Hitachi Capital lease lending company based in Japan.. The companies are planning to expand their operations on a global level to increase their market share. The company Shriram Transport Finance which is a non-banking finance provider reported a drop of 46.9% in the net profit of the company that reported the quarter ending in June of 2021.
The drop is attributed by the management of the company towards higher bad loan provisioning. However, some companies such as ACKO, a new technology insurer registered over three times gross revenue for the first quarter of the fiscal year 2021-2022 ending in June 2021. The company reported a gross premium with 120% rise with adoption of digitalisation.
The company Nicholas Financial has recorded a year on year 137% increase in the first quarter of the fiscal year 2021-2022 with direct loan originations to $5.7 million. The company has reinvested its earnings to amplify company training and expansion in technological innovations and geographical expansions. The indirect originations of the company have also increased by 21% to $20.3 million year on year.
As the global chips and semiconductor shortage has caused low inventory levels in many companies disrupting the manufacturing of vehicles. Some finance and insurance departments of automotive dealers such as Sonic automotive, Asbury automotive, Lithia Motors and AutoNation have continued to observe high revenue figures in the second quarter of 2021.
For instance, the company Sonic automotives financial department clocked a revenue of $177.3 million which was a significant increase by approximately 60% as compared to the last year. The company Huntington Auto Finance clocked in $1.9 billion which was a 58% year on year increase after the pandemic stricken year of 2020.
To know more about Global Motor Insurance Market, read our report
Whether it’s for a car, an RV, a motorcycle, or even a boat, automobile buyers believe that loan applications take too long. This is due to the masses of paperwork that financing or leasing a vehicle necessitates. Traditional loan origination is time-consuming, does not help either the customer or the lender, and raises the chance of losing a customer before they sign the dotted line.
Customer experience is important in this age of immediate everything. Traditional automobile dealers must assure client satisfaction if they want to keep and develop their customer base. Customers will not wait for a mediocre experience if they don’t have to. Smart, digital applications that use a decisioning platform to automatically pull data in. Data collection, risk modelling, and customised pricing are all automated with AI-powered decisioning tools. Online businesses are springing up all over the place, ultimately obliterating the in-person dealership experience.
Understanding the nuances of their financing package, including fees and annual percentage rates, is critical in the car-buying process for low- and middle-income consumers who were hit the hardest by the pandemic. Families in U.S. cities cannot afford the monthly payment to finance a new car. That transparency is critical because they can figure out if they can afford the automobile and manipulate the figures so they aren’t surprised or disappointed when they go into a dealership to buy a car at the last minute.
The industry that was considered as a buoyant business till 2019 with lending in United Kingdom rising from USD 28 Billion to USD 56.73 Billion from 2012 to 2017, the repayment of such lending now looks uncertain. OEMs will delay new product launches due to supply chain disruption and lower demand perception, forcing consumers who are relatively less financially impacted to postpone their buying decision.
Social distancing and work-from-home norms will reduce the need to be mobile and hence reduce the demand for cars on the whole. Fleet and rental companies have surplus cars and their demand for new cars will also remain subdued. But, as all clouds have a silver lining, there is some hope for the industry – we do see a few opportunities shaping up for auto financiers. Expiring leases present an opportunity for extension or renewal. In an attempt to weather lower fresh sales, offers to incentivize customers will lead to rise in personal contract financing.
The major players in the industry have introduced continuous investments for the development of the automotive sector and have contributed a wide share in the economic growth of the country. However, the sector has been affected by the COVID-19 pandemic largely due to the economic instability created because of the halt in the manufacturing as well as travelling activities.
The pandemic has also caused large scale unemployment as well as lowered income for the middle class. This has led people to use up their savings for survival forcing them to push new vehicle purchases. Due to the onset of the pandemic financiers are supporting customers during this hardship by introducing longer repayment schemes and lucrative deals.
For example, the company Ford is offering a delay of 90 days for the first payment of the loan for new cars, similar offerings are being made by Nissan as well as Hyundai for loan repayments. As of July 2021, the auto financing department of Volkswagen AG as well as Ford Motor company have announced plans to rescind offering credit to new customers and dealers in India.
The companies are expected to exit their financing operations from the country. In an attempt to offset the disadvantage created they would offer incentives to customers and dealers who have already been part of their finance department. The leading powersports fintech Octane Lending has raised approximately $52 million in the funding series D in August 2021. The funding has raised the company’s total equity funds over the $192 mark with a valuation of over $900 million.
The investment funds round was led by the Progressive Investment group as well as investors such as Upper90, Valar Ventures, Contour Venture partners and many more.
A leading finance company, Southern Auto Finance secured a funding worth $204.5 million in warehouse funding in August 2021. The funding was led by the Capital One and One William Street Capital management group. The funds will provide the lender with lower fund costs and even the potential to enter into the auto asset-backed securities market.
The company Maruti Suzuki India Limited in July 2021, launched a new online service named Smart Finance for the company’s Arena and Nexa. The service will provide end to end financing solutions and services to its customers pan India. Social distancing standards will drive the need for independent personal mobility. Customers who were using ride-shares and public transportation will likely switch to personal transport. This will increase the demand for cars, specifically the small cost-effective yet fuel-efficient ones.
Other factors that are expected to spur demand include increasing investments in autonomous vehicles, prompt financing from credit unions, dealers, and banks, increase in the use of online services, advancements in blockchain technology, and growing innovation in e-commerce.
Social distancing standards will drive the need for independent personal mobility. Customers who were using ride-shares and public transportation will likely switch to personal transport. This will increase the demand for cars, specifically the small cost-effective yet fuel-efficient ones.
Other factors that are expected to spur demand includes increasing investments in autonomous vehicles prompt financing from credit unions, dealers, and banks, increase in the use of online services, advancements in blockchain technology, and growing innovation in e-commerce.
Banks
Captive Auto Loan Companies
A captive finance company is a subsidiary entity of a larger corporation that manufactures and sells a product to the general public. In the case of automobiles, a captive finance company offers loans to consumers who want to buy their parent corporation’s vehicles.
Examples include General Motor Acceptance Corporation, Ford Motor Credit Company
Credit Unions
A credit union is not affiliated to a specific auto company. In such a case,loans are given to the members of the credit union at attractive interest rates
Other Financial Institutions
Includes Cooperative Banks , NBFC etc.
Direct Finance
A direct auto loan is when one applies for a car loan at a bank, credit union or other lending company
Indirect Finance
An indirect auto loan is financing that one gets through the automotive dealer, their lending partners or another financial institution.
Estimates indicate that global auto sales are expected to decline by 22% this year to 70.3 million units led by 26.6% in the US to 12.5 million units as compared to a year ago. In China which is world’s largest auto market, sales are expected to decline by 15.6% while in Europe a drop of around 13.6 million units is expected. Such numbers indicate the level of downturn which is expected to be faced by automotive finance companies across the world.
The market in the European region is changing rapidly with the introduction of electric vehicles, autonomous and connected vehicles which also foster the growth of the finance sector. The auto finance companies in such a developing phase are gaining momentum including both the independent loan providers as well as the capitalists. The countries dominating the market for promising future growth are France, UK and Germany.
The customers with long-term debts which include home loans have become challenging for the automotive finance providers to lend loans which has hindered the growth of the market. Countries such as India, Australia, Japan as well as China have higher demand for finances and loans for vehicles, which has increased the offerings for repayment of loan to longer durations from 12 months to 3 years and even 4 years.
The growth of the market in the Asia-Pacific region is estimated to be higher than other regions and has upcoming opportunities for the industry in the near future. The North American market is growing at a slower pace because of the economic disruptions created by the COVID-19 pandemic causing the instability.
However, the Latin American region as well as the African and Middle-Easten market are witnessing substantial growth rate as the demand for vehicles is growing in these regions. Moody ‘s also highlighted the potential impact of car dealership closures during the crisis on the car manufacturer finance houses, which provides billions in funding to car dealerships to buy their stock.
For Example, the finance arm of Volkswagen Group, the world’s largest car manufacturer, owed around USD 27.34 billion from dealerships till the end of 2019. Asia-Pacific is expected to have considerable market growth due to the increasing number of favourable government initiatives, especially in India, China, and Japan, to maintain consumer interest and promote growth in the automotive industry.
The global automotive finance market size is estimated at $XX billion in 2020 growing at –% CAGR till 2026
MG Motor India has launched MG e-Pay, a one-stop online car finance platform that provides an end-to-end online automobile financing journey with rapid loan approvals. MG e-Pay is created with the goal of providing customers with clear and convenient online car purchase solutions. Customers will be able to get flexible, seamless, transparent, and speedy loan approvals from the comfort of their own homes. Under the MG e-Pay program, MG has partnered with ICICI Bank, HDFC Bank, Kotak Mahindra Prime, and Axis Bank to provide personalized and quick financing solutions.
In just 5 clicks and 6 simple steps, MG e-Pay will streamline the client’s buying journey.Customers can now reserve MG cars online or at their local MG Dealership, customizing their vehicles with accessories, merchandise, and protection plans, among other things. Customers can also apply for pre-approved loans.
A leading artificial intelligence (AI) lending platform, Upstart, recently unveiled Upstart Auto Retail software, which includes financing that is supported by AI. Both consumers and dealerships may benefit from a better car-buying experience thanks to the cloud-based technology. This new software will offer access to Upstart-powered vehicle loans for the first time. Another illustration of how Alviere’s embedded financial services platform may assist brands in transforming consumer relationships from one-dimensional, one-off events into ongoing, deep, value-driven engagements is AutoPayPlus.
Alviere anticipates working with clients in the automotive industry to provide a quick time-to-market and simple path for offering new financial services to both current and potential customers without having to do any of the grunt work associated with being a financial services provider. With the launch of NGage, a new, web-based electronic point-of-sale system, Toyota and Lexus dealers across the UK are making the process of financing a car purchase for clients faster and simpler.
Customers can choose the package that’s best for them using the features offered by NGage, and once they’re satisfied with the details, they can use an electronic signature to approve the loan arrangement. With the right interest rates, quotes can be compared side by side, and financing approval can be acquired very instantly. At the quotation and agreement stages, the procedure does away with the need for paper papers, which also helps to avoid delays that may arise when documents must be physically signed and returned.
In order to give clients more options, Freedom Finance, an award-winning integrated lending and digital lending marketplace, is happy to announce the debut of an enhanced vehicle finance solution. Consumers will embark on a customised vehicle financing journey that enables Freedom Lending to better understand their requirements and offer customers more precise auto finance solutions that are suitable for their unique situations.
Freedom Finance is now able to offer Personal Contract Purchase (PCP) alongside existing Hire Purchase (HP) and auto loan options, significantly expanding its product line, thanks to the additional information it has collected to deliver this personalised service.
Customers may view their prior searches through a standalone section on the my freedom website and use the new, simplified customer journey to quickly, easily, and safely identify the best auto-finance choices for them. Before completing the full application form, users are encouraged to compare the differences between PCP, HP, and auto loan packages using the calculator that is part of the updates. To make this market-leading auto loan offer more accessible to more automobile customers, all of these services will be made available to embedded finance partners of Freedom Finance, like the RAC.
The National Automobile Dealers Association (NADA) Show in Las Vegas will include the introduction of Solera Auto Finance by Solera Holdings, LLC (“Solera”), the industry pioneer in vehicle lifecycle management. At the help of Solera Auto Finance, franchise and independent dealers will be able to offer auto loans with low rates to a wide range of potential used car customers.
With the addition of a new competitive financing option, Solera Auto Finance enhances its Dealer Management Systems (DMS), which include iDMS for independent dealers and Auto/Mate for franchise dealers. Georgia, Indiana, Kentucky, North Carolina, Oklahoma, Virginia, and Washington will be the first states where Solera Auto Finance will be available. In the near future, Solera wants to add more than a dozen new states.
Mobility services are exploding in popularity, especially on well-known ride sharing platforms. It is estimated that that annual revenue from such mobility services could soar up to trillions in 2030.
The auto finance industry should respond to such change with a range of strategies to better own the customer relationship in this new space, simplifying the payments ecosystem, and partner with (or compete with) start-ups moving into the space.
Insurers and banks are piloting a variety of blockchain-powered financing solutions, and auto captive lenders are serving as test-beds for manufacturer blockchains. The most exciting prospects include putting the vehicle on a blockchain to support for insurance, fraud detection and floorplan financing, and using blockchain to turn the vehicle into a mobile wallet.
ARTIFICIAL INTELLIGENCE WILL OPEN NEW AVENUES FOR GENERATING SALES
It has traditionally been understood that banks would know more about the customer while the manufacturer’s captive lender would know more about the vehicle. That is now changing, as AI enable banks and fintech lenders to tap new sources of consumer data for predictive insights. For example, these systems can use advanced analytics to predict which vehicle options a consumer may want with surprising accuracy.
One payment, one vehicle and one party has been the traditional model in the auto finance sector. However, with the emergence of the subscription model, in which consumers pays a flat fee for access to the car of their choice, and the shared ownership model, in which a single vehicle is owned by more than one person, the landscape is changing. These models could help keep vehicles affordable as technology features increase manufacturing and maintenance costs
This probably means a smaller market for auto sales. Dealers will need to decide if they build a mobility service, consolidate and attempt to compete at scale or pick another path to profitability in order to ensure their survival in the long run.
The Emergence of Real-World Assets in the DeFi field.The field of decentralised finance (DeFi) is developing quickly. For digital assets, new developments are allowing unique use cases and unleashing liquidity. The growth of tokenized real-world assets is one of the most encouraging trends. Investors now have access to assets like real estate, art, and other collectibles that were formerly impossible to obtain or exchange.
Real-world assets are represented on the blockchain through the process of tokenization. Illiquid assets can be made transferable round-the-clock on international secondary markets by releasing digital tokens that reflect ownership or a share in an asset. Investors may develop diverse portfolios that include real-world and digital assets by purchasing and selling fractional ownership of various assets.Real-world assets that have been tokenized provide DeFi with a completely new design area for lending, trading, and yield-generating protocols.
DeFi can attain size and sustainability by using resources worth billions of dollars that are found in the real world. Users get access to fresh trading and income opportunities from assets they are familiar with and confident in. Overall, by linking the physical and digital worlds, tokenized real-world assets have the potential to completely change DeFi. This emerging field has a promising future.Real-world assets (RWA) that have been tokenized are a fresh opportunity for decentralised finance (DeFi). RWAs might have a substantial influence on the DeFi ecosystem if they are tokenized and included into DeFi protocols.
Liquidity increased. RWAs that have been tokenized would increase the liquidity of DeFi lending protocols and exchanges. Investors can swiftly enter and exit holdings without having to go through a drawn-out selling procedure. Because of this, institutional investors and high-net-worth people seeking to diversify their portfolios find RWA tokens to be appealing.
In DeFi lending protocols, RWAs like real estate, commodities, and infrastructure can be utilised as collateral. This lowers the risk for the lenders while increasing the funding options for the borrowers. For instance, a property owner might obtain a loan without having to sell the property by using it as collateral.A decrease in volatility. Compared to cryptocurrency, RWAs are often less volatile. Their incorporation in DeFi protocols could aid in lowering the possibility of unexpected price collapses and stabilising interest rates. DeFi is now more appealing to consumers and investors in the mainstream as a result.
Automating ownership of assets. RWAs may be handled and transferred automatically with the use of smart contracts, removing the need for middlemen and facilitating quicker and more effective transactions. Smart contracts have the ability to be programmed with compliance criteria, guaranteeing that all statutory and regulatory requirements are completed without any problems. This improves openness, lowers mistakes or conflicts, and eventually increases overall effectiveness.
By incorporating real-world assets into DeFi, institutional DeFi can develop, fusing the effectiveness of decentralised finance with legal protections. Institutional DeFi takes care of the AML and KYC procedures, assuring compliance and luring institutional participants looking for better regulatory standards. By fostering a trustworthy and reliable environment, this convergence encourages further engagement and cooperation between the conventional financial institutions and the blockchain-based DeFi industry.
The traditional real estate market has a long history of exclusivity, illiquidity, high entry barriers, and a difficult buying procedure. Real-World Assets (RWA) have, however, made real estate investment more accessible and affordable thanks to the blockchain ecosystem. Particularly among millennials, renting has emerged as a preferred option over securing a lengthy mortgage. RWA offers chances for real estate professionals and investors to meet the needs of this market.
With RWA making up around 40% of the market, the tokenization of real estate assets on the blockchain has significantly changed the industry. The real estate industry’s future is being shaped by the move towards digitised assets, including digital land, which is in line with millennials’ changing wants and tastes. The benefit of fractional ownership, which divides the ownership into several portions, is provided by the tokenization of works of art or collectibles. By increasing accessibility, this fragmentation allows a broader spectrum of investors to take part in the ownership of these assets.
As a result, tokenization improves price transparency and liquidity in the market for fine art and antiques. Even while tokenized real-world assets have a lot of potential for DeFi, there are still big obstacles that get in the way of widespread use. Fragmentation Even while it’s advantageous for fractionalization, ownership fragmentation might make it more difficult to come to judgements about the asset and establish consensus. It might get harder to reach consensus among token holders when ownership gets more dispersed as a result of tokenization.
Conflicts and disputes might result from this fragmentation, which could have an adverse effect on the asset’s overall stability and value. To preserve the asset’s value and integrity, it is crucial for token holders and other stakeholders to build up efficient governance processes and channels for communication.Inadequate Regulation
Currently, tokenized assets are not heavily regulated. Many conventional investors and businesses refrain from entering the market due to this legal ambiguity. Regulations must be put in place to safeguard investors while promoting innovation.
Advanced Technology To implement and comprehend the technology behind tokenized assets, which might be complicated, specialised expertise is needed. Some people are prevented from developing or investing in these assets by the high entrance barrier. Systems that are easier to understand and utilise must be created for widespread use.
Some of the key players in automotive finance market include Bank of America Corporation, Ford Credit, Ally Financial Inc, Honda Financial Services, Hitachi Capital Asia-Pacific Pte. Ltd., BMW Financial, HSBC Holdings plc, Maruti Finance, HDFC Bank Limited, TATA Motor Finance. ICBC (Industrial and Commercial Bank of India), Volkswagen AG, Bank of China, BNP Paribas SA, Capital One Financial Corporation, Standard Bank Group Ltd, Wells Fargo & Co, Mercedes-Benz Financial Services (Daimler AG) and Toyota Financial Services.
Furthermore, the automotive financing market in Asia Pacific has become highly competitive with an increase in the number of used-car outlets and vehicle showrooms. Moreover, a decline in automotive loan rates in the region is further expected to propel the regional growth.
In May 2021, the company Daimler Truck Financials introduced a finance program for its Western star and Greightliner trucks named Keep the World Moving. According to the program, delays of up to 120 days are allowed for the first repayment as well as an allowance on the model of up to $5,000. The program is estimated to increase the sales as well as the market share of the company that were decreased due to the pandemic.
The automaker Tata Motors in August 2021, announced a partnership with NBFC Sundaram Finance group to offer vehicle loans for its customers. The finance group will provide loans for the new range of Forever cars for 6 years with 100% financing. The agreement is also facilitating a special scheme named as the Kisan Car Scheme for farmers to repay their loans, under the scheme farmers can repay in installments every 6 months once. Some of the other partnerships by the Tata group are:
The company Mahindra Financial Services has acquired 58.2% of the Sri Lanka based Ideal Finance with investment worth millions. The company has plans to incorporate its business strategy using the customer base of Ideal Finances and creating an effective business model. The company Volkswagen Finance Pvt. Ltd. in January 2021, announced the acquisition of the leading digital platform company KUWY Technologies as a majority stake holder.
They had already acquired a 25% stake in the firm in September 2019. They are planning to improve the efficiency in the loan process as well as reduce the processing time. In January 2021, Axis Bank announced partnership with the automaker Hyundai Motor India Ltd. to offer retail financing services in the automotive industry. The agreement is set to provide vehicle loans directly from the company’s Click to buy (CTB) platform.
In December 2020, Daimler’s commercial vehicles division announced partnership with 18 leading financial banks along with NBFCs to offer financing options to its customers. Japan’s export credit agency, which is state-owned, has agreed to offer Nissan Motor corporation credit up to $2 billion as part of the agreement in order to facilitate sales in the US.
The funds are part of the $4.1 billion credit agreement between Nissan Motor Acceptance Corporation and Japan Bank of International Cooperation.
