How prepared are you and your customers for a rates rise?
There have been noises coming from various sources for a while now that the Bank of England was contemplating an interest rate rise.
On the Today Programme, Mark Carney has now gone about as close to confirming as he can that such a rise can be expected in the near future. It sounds like it could happen as early as in the November Monetary Policy Committee (MPC) meeting.
Thankfully he also said: “We’re talking about just easing the foot off the accelerator to keep with the speed limit of the economy and so interest rate increases when they come – when and if they come – will be to a limited extent and gradual.”
The key words here are ‘limited extent’ and ‘gradual.’ The BoE is aware large sections of the population are heavily indebted, included large mortgages that were only affordable thanks to the low interest environment that has existed for a while now. A sudden upshift in interest rates could spell disaster for those not on a fixed rate term.
Now for motor finance lenders, this might seem less relevant as HP, PCP and PCH are all nearly always fixed rate.
But what happens if consumers start to struggle with other loans that aren’t fixed rate.
If you have a customer whose mortgage goes up £100 a month due to interest rate rises, did your affordability assessment take into account this eventuality? If it looks like they’re struggling to juggle existing loans as a result of a rise, is there a way you can help them?
If a customer can no longer afford credit outside of motor finance, this could well affect your existing customers, as they struggle with their monthly bills overall.
One other way this might affect motor finance lenders is in how competitive their finance offers are. Finance has become incredibly popular, partly as a result of being offered on attractive terms – sometimes 0% APR.
If the base rate goes up, will this still be possible? Will your offer seem as attractive if you need to raise your rates?
Then there is affordability to consider. If the APR goes up, this will alter the size of the monthly payments for new customers, and push affordability down.
Probably the simplest way to compensate would be to increase the length of the terms, but this both seems to go against the direction of consumer habits (which is trending towards faster replacement cycles) and would also damage sales (as customers would replace their cars less often).
An alternative might be to increase deposit contributions, or add extras, such as free services offered with finance, but this could hurt margins.
I’m hoping we’ll see some innovation from lenders in this space as a way of keeping finance more attractive compared to using cash if it does indeed become more expensive.