BRAKING POINT?
WHAT THE COST OF LIVING CRISIS MEANS FOR THE CAR FINANCE SECTOR

STEPCHANGE

THE COST OF LIVING CRISIS IS CHANGING THE FACE OF DEBT
“Problem debt only affects people on low incomes”. That’s a misconception we hear at StepChange Debt Charity on a regular basis. But now more than ever, it’s just not the reality we see every day. The unprecedented squeeze on consumers caused by the cost of living crisis is changing the profile of customers we support in profound ways.

In 2022, six million people visited the StepChange website for support, and in May this year, demand for debt advice was up 8% versus the previous year, and up 24% versus May 2021.

An increase of this magnitude shows that the crisis is not only affecting low-income groups, but that increasingly those who may previously have been financially comfortable are now falling into debt. And we know, whether it’s shame or stigma, or fears about their credit score and access to credit, customers can be hesitant to reach out for help.

At StepChange we regularly analyse our client data to identify trends in the debt advice sector and share this with our partners to help them better identify and support customers in need.

In our recent report, ‘Why debt advice matters in the car finance sector’ we explored our client data in detail which showed a number of concerning trends for the automotive finance sector. And amid the economic backdrop, unfortunately the worst is likely yet to come for customers who may not be well-equipped to weather the storm.

MORE CUSTOMERS WITH CAR FINANCE NEED DEBT ADVICE
There’s no doubt that the growth of Personal Contract Plans have fuelled the growth in finance penetration we’ve seen, enabling consumers to finance cars at more affordable monthly payments than traditional Hire Purchase. This means 84% of cars are now bought on finance.

However, with the current pressures on household finances, car finance repayments are now becoming challenging for more households. At StepChange we’ve seen a 61% increase in the number of clients with an outstanding car finance debt since January 2020, which accounts for a 14.8% increase in the overall proportion of our clients who have a car finance debt.

The average balance of this debt has risen by 20% during this period and concerningly, our data indicates that customers with a car finance agreement may be more vulnerable to additional financial detriment.

CHANGING PROFILE OF CUSTOMERS: MORE DEBT AND MORE VULNERABLE TO INTEREST RATES
Our report shows that clients with a car finance agreement tend to have incomes around 30% higher than our average client, perhaps unsurprising given car finance is predominantly considered a prime product. However, despite this increased income, their monthly surplus of £162 is just £62 higher than that of our average client.

Despite having low monthly surpluses, these customers are far more indebted, with over £4,000 more in unsecured borrowing than clients without car finance. Perhaps most worryingly, it shows that car finance clients are over 80% more likely to have a mortgage and our analysis shows that increases in mortgage payments could push their monthly surplus into a deficit.

This poses a number of sector-specific challenges for the car finance industry, foremost that the nature of Hire Purchase creates the risk of customers being in negative equity at the point of reaching debt advice – a potential debt trap. Car finance providers have other issues to balance, including providing customers the support they need as early as possible,

balancing collections with delivering a good customer outcome for customers dependent on their vehicles for their jobs, and of course being able to evidence how they are supporting customers to meet FCA requirements under Consumer Duty.

WHAT SHOULD ORGANISATIONS DO?
Under Consumer Duty, car finance lenders will need to meet the FCA’s higher expectations on how they support customers. Amid all the difficulties facing households, this challenge is even more pronounced for lenders.

One of the key requirements will be around identifying customers in need, providing the right support to them, and making it easy for them to access. Making the support easy to access is more complicated in the car finance world, as some customers may confuse the multiple touchpoints they have (dealer, brand website, finance company) and not know where to turn for help.

At StepChange we work with the UK’s largest banks and lenders to provide simple, low-friction, referrals into debt advice utilising all their channels and touchpoints in the customer journey.

A second key challenge will be to evidence outcomes for customers. We provide regular MI to our partners demonstrating the result of customers referrals, helping partners to provide additional support to customers and crucially to evidence customer outcomes.

A deep dive into the challenge: To expand on our insight, we recently commissioned a detailed report with Experian on the emerging trends that car finance providers need to be aware of. We’ll be exploring the findings and looking at some of the practical steps lenders can take to support customers in more detail at a joint webinar in September.

To find out more about how StepChange could help your business, please get in touch today.