Many buyers of a new car will use some form of finance package often provided by the dealer or by a friendly broker who specialises in this type of loan. These are relatively straight forward, the finance company knows the retail price of the vehicle (including any extras fitted to the car) and can assess the credit worthiness of the buyer. If the price matches the buyer’s ability to service the credit then the deal is done.
Trillions of dollars are tied up in new car loans, in some countries even exceeding credit card or home loans! There is actually another story here – many experts fear a sub-prime implosion of debtors sinking some of the finance houses, similar to the start of the GFC back in 2008.
For many used car sales, finance is also a competitive landscape as dealers of new cars also sell packages for late model vehicles along with some form of warranty. Like a new car, the finance companies can assess the risk by getting a fairly accurate valuation of the vehicle by the dealer. As used car dealers grow and expand across cities or even State lines (as in Australia) they get the clout and knowledge to offer services similar to a franchised dealer. Some of them make more on the finance than they do on the cars – having bought ex-fleet vehicles that may not have a great resale value.
There is one segment of the market that until recently was a difficult area for buyers to get finance for. This segment is the individual seller/buyer arrangement, i.e. A buyer visits a seller at their home, checks out the vehicle and negotiates a deal. In most cases this is a cash transfer. If the vehicle is of a higher value, then the seller would probably attempt a trade at a dealer. However, what if they don’t want to trade but simply dispose of the vehicle?
In the USA, an online marketplace has been established called Shift to cater for this type of transaction. Shift is also available through an app for those that use a mobile device more than a desktop computer. Mostly servicing California and Washington DC at this time, it provides a method for the transaction to take place between seller and buyer with a finance package available for the buyer.
This is done by Shift’s own staff who assess the car’s value, photographs it and advertises it on their web site. When a buyer is interested, they arrange a test drive and then handle all the paperwork including any loans needed. Obviously they will charge a fee for this service!
Shift ensure that the vehicle and buyer meet the finance broker’s risk assessment and thus provide a similar service as a franchised or used car dealer would. They claim to do this for a lower fee than a dealer thus encouraging what they term “a peer to peer” transaction.
I had a look at their San Francisco marketplace and it was full of premium late model German vehicles and also a smattering of Tesla Roadsters, not surprising as the cars were assembled and finished in nearby Fremont! There were over 300 cars looking for a new owner.
I wonder how fast it will be before companies are established to cater for the low value market. If that happens, we could see an interesting shift in finance that might cause a real sub-prime effect for car loans. As I said earlier, many finance analysts believe this is about to happen today with the volume of car loans already written, however catering to a lower segment of the market could kick-start another crisis!
I like the idea that Shift has developed. I think it makes buying a used car from a seller much easier and safer. The intermediary ensures that the transaction is done smoothly and with the arranging of the test drive means that both the buyer and seller have a level of protection not seen before. Fewer sellers can be duped into letting someone drive off in their car, never to be seen again and the buyer has the protection that the test drive information is recorded so it should reduce the issue of personal safety.