The Global Car Finance Industry is at the cusp of significant growth and is expected to attain momentum with the adoption of new technologies and Digitalization has become the “buzz” word among the Market Players, Digitalization is definitely a game-changer for the Car Finance Industry and is expected to bring about a Paradigm shift in the way the Industry Operates. The Car Finance Industry is expected to grow at a healthy CAGR of 14.3% in the forecast period (2020 -2027)
- Definition / Scope
- Market Overview
- Market Risks
- Market Drivers
- Market Restraints
- Industry Challenges
- Technology Trends
- Other Key Market Trends
- Impact of COVID-19
- Market Size and Forecast
- Market Outlook
- Technology Roadmap
- Competitive Landscape
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
Car finance includes a variety of financial products, such as loans and leases, that enable customers to purchase a vehicle. Furthermore, original equipment manufacturers (OEMs), banks, credit unions, brokers, and other financial firms are the primary distributors of car finance goods and services. Furthermore, Car or auto financing is a programme that allows borrowers to buy cars without having to pay in full upfront.
Car finance refers to the various financial products which allow someone to acquire a car, including car loans and leases.
A car loan is a type of financial assistance that allows you to buy a car with a small down payment from your own pocket. The lender’s money can be repaid in equal monthly instalments with a negotiated rate of interest for a period of time. In most cases, car loans are backed by the vehicle being purchased. It is used as collateral for the car loan. If the loan is not repaid within the agreed-upon time frame, the lender will take possession of your vehicle and sell it to satisfy the debt.
A lease is a contract between a lessor (the owner of the property) and a lessee (the individual who rents the property) (the person who gets to use it during the term of the lease). Car leases usually enable the lessee to drive the vehicle for a set number of miles (under 12,000 per year is typical) over a set number of years (say, three years). The lessee pays a set monthly charge for the privilege of driving the car, and the lessee returns the vehicle to the lessor at the end of the contract. Since the lessee does not purchase the entire vehicle, lease rates are not solely determined by its current value. Instead, the lessee only pays for the vehicle’s value for the duration of the contract. Lenders calculate lease payments based on the vehicle’s residual value, or what they estimate the car will be worth when the lease is over.
The global car finance market was estimated at US$ 129 billion in 2020, with a CAGR of 14.3% projected over the forecast period to reach a Market Size of US$ 328 Billion in 2027.
The banks’ segment is expected to expand significantly over the forecast period as banks offer secure financing to their customers. Customers may also apply for preapproval via their banks. Customers may use this tool to compare approximate loan deals.
Many consumers choose direct auto loans because they can easily access and obtain loans from credit unions, banks, and other loan lending companies all over the world.
Customers are focused on leasing because it is a more versatile model than others for new, shared, and used vehicles, and it can provide services like insurance.
The number of passenger vehicles on the road, which includes pickup trucks and crossovers, continues to rise around the world, providing prospects for growth in the passenger vehicle segment over the forecast period.
The introduction of advanced tools such as biometrics, e-contracts, and machine learning, as well as the presence of many prominent automotive finance providers in the European region, are expected to drive regional market growth over the forecast period.
The increasing investments in autonomous vehicles around the world can be attributed to the market’s growth. Autonomous vehicles provide drivers with protection and comfort, prompting multiple end users to invest heavily in R&D. Furthermore, investments in autonomous vehicles require funding from credit unions, dealers, and banks, resulting in an increase in demand for automotive financing. Increasing new customer registrations, as well as an increase in car sales, are expected to propel the market forward.
Because of the increased use of automotive financial services, the time it takes to lease or purchase a car has decreased. To efficiently create a strategy to identify the selling price of returns, several automotive companies are focused on incorporating risk management strategies and advanced data analytics models. The market is expected to expand as a result of the aforementioned factors.
Due to advances in blockchain technology, superior telematics, a rise in the use of online services, and the evolving trend of digitalization, the number of automotive finance customers is increasing. Customers want simple and fast financing for used or new vehicles. Customers are also choosing finance companies that provide data-driven consulting services. Furthermore, these programmes assist customers in determining a financial plan as well as appropriate vehicles that best meet their needs and interests.
The COVID-19 outbreak is expected to have a negative effect on the industry. The instability in the economy has caused car buyers to put off purchasing a new vehicle. Despite the slowing of car purchases, auto lenders would have to prepare for an increase in servicing operation, such as refinancing and extension requests. To speed up remote service processes, auto lenders are turning to digital resources.
The Primary Risk Factor to be considered before venturing into the Global Car Finance Industry include
As there is low barrier for entry, the new entrants are flocking into the Car Finance Industry backed by Institutional Funding the market appears to be fragmented with the presence of a considerable number of companies. The smaller companies lack capability and scale to respond to disruption in the market and as the market is significantly fragmented there is an absence of a true market leader which leaves the players to hold miniscule market share.
Since this market is booming there are more entrants in the market creating more competition with their various unique services, on the other hand, the major players are trying to increase their customer base. Therefore, the market concentration is low which directly affects the revenue generated from the segment.
Top Market Opportunities
The Global Car Industry offers a plethora of opportunities for New Entrants and Existing Players alike. Some of the top opportunities include
Mobility as a Service
Mobility services, especially on well-known ride-sharing platforms, are booming in popularity. Annual revenue from such mobility services is expected to reach trillions of dollars by 2030.
The auto finance industry has plethora of opportunities with a variety of strategies, including better owning the customer relationship in this new space, simplifying the payments ecosystem, and partnering with (or competing with) new entrants.
Emergence of new business models
In the auto finance industry, the conventional model has been one payment, one car, and one party. The environment is shifting, however, with the introduction of the subscription model, in which customers pay a flat fee for access to the car of their choosing, and the shared ownership model, in which a single vehicle is owned by several people. As technology features increase manufacturing and maintenance costs, these models may help keep vehicles affordable.
Implementation of technologies in existing product lines
Car finance companies are focusing on providing value-added services to their customers, expanding current product and service offerings by integrating innovations like artificial intelligence, business analytics, and blockchain, which are expected to enhance service quality and boost customer loyalty. Furthermore, these innovations allow businesses to more precisely arrange new and used auto loans. As a result, car finance providers can expect lucrative prospects in the coming years as existing products and services are expanded by the use of emerging technology.
The Major Factors driving the growth of the Global Car Finance Industry include
Attractive Financing Schemes driving Passenger Car Sales
Globally, the interest rate of new car is at one of the lowest levels in the last three years. The average new-car loan, on the other hand, currently has a 12% lower interest rate than the average used-car loan. Previously, financial institutions/banks will only fund 70-80% of the overall vehicle cost. However, since these institutions/banks already provide 100 percent financing on vehicles, consumers are increasingly interested in purchasing a new car rather than a used car. Since Q1 2016, the average interest rate for such buyers has increased by nearly 39%.
Car finance is also becoming more popular, as various banks/OEMs and credit unions offer customers a variety of financing options with low interest rates.
Table: Average Interest Rates offered by various Financing Institutions
|Financing Institutions||Interest Rate|
|Credit unions financing rates||17%|
|Car manufacturers/OEMs financing rates||13%|
|Regional banks financing rates||8%|
|Community and small banks financing rates||10%|
Surging adoption of green vehicles
The adoption of green vehicles is growing, which is fueling the growth of the automotive finance sector. Electric passenger vehicle penetration has increased as the production volume of electric vehicles has increased, the demand for fuel-efficient vehicles has increased, and government regulations have become more stringent. Electric vehicles minimize traffic congestion and emissions while increasing productivity in the commercial sector. The growing need to reduce the costs of commercial goods transportation is driving the growth of this industry.
These vehicles follow government policies and depend on government subsidies. Several auto lenders have teamed up with governments to give customers lucrative incentives on the purchase of electric vehicles. In addition, fleet operators have customized auto financing solutions for the addition of electric and hybrid vehicles to the fleet. Volkswagen Grune Flotte and Daimler Ecostar are two programmes that include low-emission car leasing deals, driver training, emission reduction tips, and encouraging the use of car sharing.
Increasing global average price of vehicles
One of the major growth drivers in the industry is the massive demand for new car models and branded cars around the world. As customer tastes and trends for car purchases have shifted dramatically, demand for car financing and loans is expected to grow, maintaining its market dominance. As a result, as demand for automobiles grows, so does the global average price of automobiles. As a result of the dramatic increase in vehicle costs, customers are being pushed to turn from direct sales to auto or car financing in the industry.
For example, the average price of a new car purchased in the United States rose to $36,800 in 2020, up from $35,742 in 2018, with interest rates hovering about 6% and 2%, respectively. As a result of these exorbitant prices levied over the average vehicle price, the +car finance market is expected to rise at a faster rate during the forecast period.
The Key Restraints hindering the growth of the Global Car Finance Industry include
Surging delinquent loans
In the first quarter of 2019, the car finance industry had the highest share of seriously delinquent loans ever–50 percent more than at the height of the recession in 2010, with serious delinquencies accounting for 4.69 percent of overall outstanding. All of this is taking place as underlying car sales have remained stagnant in recent years due to a number of factors, including the depletion of post-recession pent-up demand and increasing gas prices. There is no single cause for the growing delinquencies in the auto lending industry.
Mounting rivalry in the automotive industry is one of the major challenges that which impede upward growth in the car finance industry, stressing operations, strict credit underwriting regulations, risk management, and other facets of the product that need to be reworked.
The Major Challenges faced by Industry players in the Global Car Finance Industry are
Slowing Demand for Car Finance
The main trend in the car finance sector is that demand for industry financing to buy vehicles is slowing, resulting in lower profits for many lenders. As a result of these factors, the industry’s income has decreased over the last few years. Industry revenue is expected to continue to decrease over the next five years, until 2027. Slowing demand is expected to constrain industry growth over the next forecast period, increasing borrowing costs and slowing vehicle sales.
According to J.D. Power’s survey and research, new car retail sales in 2020 will be lower than they were in 2019. As compared to 2019, retail sales decreased by 14%, reaching 63.8 million units from 74.8 million units.
The vehicle financing sector has suffered a downturn in recent years as a result of the volatile economy. Since then, development has been extremely slow. As a result, many of the major players have decided to close their automotive finance divisions and concentrate on other sectors. Given the decline in income following Covid-19, it’s understandable that several banks began re-examining credit scores. In such a scenario, auto finance companies consider many factors about the borrower, such as income status, credit rating, and previous loan background, among other tangible and intangible factors, limiting the availability of car finance for consumers and impeding the industry’s growth.
Digital technologies have brought about a paradigm shift in every Industry segment and the Car Finance Industry is not far behind in terms of technology advancement, some of the emerging and turn-key technologies expected to be a Game-changer in the Global Car Finance Industry include
Artificial Intelligence and Machine Learning
It has long been assumed that banks would have a better understanding of the consumer, while the manufacturer’s captive lender would have a better understanding of the car. That is beginning to change, as artificial intelligence allows banks and fintech lenders to tap into new sources of customer data for predictive insights. These systems, for example, can use advanced analytics to predict with surprising accuracy which vehicle choices a customer might want.
Emergence of Block Chain Technology
Insurers and banks are testing various blockchain-powered funding solutions, and car captive lenders are acting as test beds for maker blockchains. Putting the car on a blockchain for insurance, fraud prevention, and floorplan financing, as well as using blockchain to transform the vehicle into a mobile wallet, are among the most exciting possibilities.
Other Key Market Trends
Shift towards Subscription and Shared-Ownership Models
Subscription and shared-ownership car loans are one trend that will gain momentum in 2020. Customers used to have only one option: to finance a single car from a lender. This structure didn’t work for everyone, particularly for people who don’t drive very much or subprime borrowers who can’t get a conventional car loan.
The lack of diverse car loan options is particularly frustrating for people who live in big cities. As the population of major cities in the United States increases, parking becomes scarcer. Furthermore, congested roads prevent many people from driving at all.
Impact of COVID-19
The pandemic’s outbreak has resulted in a dramatic drop in consumer trends and preferences for car purchases. As a result, the global car finance industry has been significantly impacted. However, the global situation is steadily improving, and the market is expected to return to its previous position soon.
At the same time, it’s worth noting that people all over the world have begun to favour private transportation to public transportation, which has resulted in a mixed effect on the market.
Market Size and Forecast
The Global Car Finance Industry is valued at US$ 129 Billion in 2020 and is poised to grow at a CAGR of 14.3% to reach a Market Size of US$ 302.6 Billion in 2027.
Global car sales witnessed a slowdown and sales dropped by 22% in 2020 to 70.3 million units, led by a 26.6 percent drop in the United States to 12.5 million units, according to estimates. Sales in China, the world’s largest car market, are expected to drop by 15.6 percent, while sales in Europe are expected to drop by about 13.6 million units. Such figures reflect the severity of the downturn that car finance companies around the world are likely to face.
However, factors such as the increasing investments in autonomous vehicles around the world can be attributed to the market’s growth. Autonomous vehicles provide drivers with protection and comfort, prompting multiple end users to invest heavily in R&D. Furthermore, investments in autonomous vehicles require funding from credit unions, dealers, and banks, resulting in an increase in demand for automotive financing. Increasing new customer registrations, as well as an increase in car sales, are expected to propel the market forward.
Market Size based on Provider Type
In 2020, the banks’ segment dominated the industry, accounting for more than 57.0% of global sales. The banking segment growth in the car finance Industry can be attributed to the fast-processing features combined with the need for minimal documentation.
The Banks segment accounted for 57% of the market share and generated revenues to the tune of US$ 73.53 Billion in 2020 and is poised to grow at 12.2% to reach a Market Size of US$ 164.6 Billion in 2027.
Over the forecast period, the OEMs segment is expected to grow at the fastest rate. Since similar car components, such as those found in the vehicle financed, are available for repair or replacement, automotive OEMs have better after-sales services. The OEMs segment accounted for 35% of the market share and is projected to grow at a CAGR of 15.7% to attain a value of US$ 125.3 Billion in 2027 from US$ 45.15 Billion in 2020
The other financial institutions segment constitutes 8% of the market share and is poised to grow at 14.5% to reach a Market Size of US$ 26.6 Billion in 2027 from a market value of US$ 10.3 Billion in 2020.
Market Size based on Purpose Type
In 2020, the loan segment dominated the industry, accounting for more than 60.0 percent of global sales. For the majority of the world’s population, taking out a loan to buy a car has become the standard. The loan segment also generated revenues to the tune of US$ 77.4 Billion in 2020 and is projected to grow at a CAGR of 13.6% to reach a Market Size of US$ 189 Billion in 2027.
The leasing segment is expected to rise at the fastest rate in the forecast period. The growing number of leasing providers in emerging economies like India, China, and Japan can be attributed to the segment’s growth. The leasing segment accounted for 38% of the market share and is poised to grow at a CAGR of 16% to reach a Market value of US$ 145.8 Billion in 2027 from a Market Size of US$ 51.6 Billion in 2020.
Market Size based on Application
The personal application segment dominated the car finance industry in 2020, accounting for more than 62.0% of global sales. The rising number of female drivers, an increase in new passenger car registrations, and the rise of new generation riders are all contributing to the segment’s growth. The personal application segment contributed to US$ 80 Billion of the market revenue and it is poised to grow at a CAGR of 13.4% to reach a Market Size of US$ 192.9 Billion in 2027.
Over the forecast period, the commercial application segment is expected to rise significantly. Since commercial vehicles are more costly than other vehicles, many banks and financial institutions have created affordable loan facilities with clear terms and conditions. The commercial application segment is valued at US$ 49 Billion in 2020 and is expected to grow at a CAGR of 16.2% to reach a Market Size of US$ 140 Billion in 2027.
In 2020, Europe dominated the automotive finance industry, accounting for over 39% of global sales. The presence of a large number of automotive finance service providers in the area can be attributed to the region’s market growth. Many industry players are emphasizing the use of mobile and online platforms to deliver their services. This initiative gives these players a leg up on the competition. Europe attained a Market Size of US$ 50.3 Billion in 2020 and is estimated to grow at a CAGR of 13.4% to reach a valuation of US$ 127.8 Billion in 2027.
The fastest-growing regional market is predicted to be Asia Pacific. The increasing number of favorable government initiatives in economies such as India, Japan, and China to promote automotive industry development and sustain consumer interest is expected to spur regional market growth. The selling of automobiles is growing in the area. As a result, the growth of the regional market is projected. Asia-Pacific accounted for 18% of the market share and attained a valuation of US$ 23.3 Billion in 2020 and is projected to grow at a CAGR of 16.2% to reach a Market Size of US$ 66.7 Billion in 2027.
North America held market share of 27% of the market share and totaled US$ 34.83 Billion of total sales in 2020 and is projected to grow at a CAGR of 13.6% to reach US$ 85 Billion in 2027.
South America is witnessing significant growth rate of 15.2% and it accounted for 11% of the market share and market size of US$ 14.2 Billion in 2020 and is expected to reach US$ 38.2 Billion in 2027.
Middle-East & Africa constitutes 5% of the market share and generated revenues of US$ 6.45 Billion in 2020 and is expected to grow at a CAGR of 14.1% to reach US$ 152.3 Million in 2025.
The global car finance market was estimated at US$ 129 billion in 2020, with a CAGR of 14.3% projected over the forecast period. Though the Car financing Industry witnessed a downturn mainly fueled by economic volatility and the outbreak of the COVID-19 pandemic causing decline in car sales. With policy measures mainly focused on economic recovery and growth, the Global Car Finance Market is poised to witness significant growth mainly driven by growth in consumer spending across the world.
The Car Finance sector is expected to rise in response to increasing demand for passenger cars, the adoption of alternative-fuel vehicles, and proactive government policies to encourage the use of electric vehicles. Lenders are using digital tools to improve consumer service, business development, and organizational capabilities. There has been an increase in the number of pure digital automotive lenders, which has increased market competition.
The rise of digitalization in the automotive industry has prompted lenders to incorporate digital technology into their business models in order to generate more revenue. To provide timely services and enhance customer experience, online services such as credit approval, car search and selection, pricing, contracting, and communicating directly with lenders are available.
The Car Finance Industry faces hurdles in the form of Increasing Competition, Surging delinquent loans and a Volatile Economy. However, the industry is poised for significant growth with opportunities derived from new trends such as Mobility as a service, Emergence of new business models and Implementation of technologies in existing product lines.
Digitalization is one of the major trends emerging in the Car Finance Industry, The Industry players are exploring a range of digital technologies to smoothen and simplify the process of Car Financing by adopting advanced and turn-key technologies such as Blockchain, Artificial Intelligence (AI) and Machine Learning (ML) as millennials form the major part of the new customers of the Global Car Finance Industry and as obvious most of the customers are tech-savvy, the Car Finance Industry players are shifting towards integrating technology and offering solutions to improve customer experience and hence, retaining existing customers and grabbing new customers into their portals by offering Omnichannel experience by integrating an all stop solution into their services by amalgamating a range of solutions into their customer experience portal including search-engine optimization, social media presence and Customer Connect Portals.
In the near future, these car finance industry developments will play a significant role in the lending sector. The use of online applications and automated decisioning is the most significant development right now, as they are already commonly used in the industry.
The vast majority of auto lenders will be using AI and machine learning to make decisions and monitor loans over the next few years. Alternative car loan models such as shared-ownership and subscription-based lending should also be considered. This is one of the trends that will shape the future of automobile ownership.
Auto finance companies will successfully grow with the industry as long as they are open to incorporating emerging technology into their current processes.
The car finance industry is inherently fragmented. The market is in its early stages of growth, and competition is expected to heat up over the forecast period. To strengthen their position in the industry, leading players are pursuing a variety of strategies, including alliances, strategic joint ventures, mergers and acquisitions, and geographic expansion. The burgeoning subscription economy is reshaping consumer dynamics in the car finance industry.
Key Market Developments:
In January 2021, Volkswagen Finance Pvt. Ltd. (VWFPL)India increased its stake in Chennai-based KUWY Technology Service Pvt Ltd. (KWY), acquiring a majority stake in the latter to provide value-added services to its customers through digital platforms. The primary goal of this acquisition is to reduce loan processing time, resulting in a win-win situation for both dealers and customers.
In January 2020, Volkswagen AG and Ford Motor Co announced a collaboration that brings together the auto finance market’s strengths and will likely invest and grow into joint production of electric and self-driving technology.
Consumer interest in purchasing vehicles is strong, so industry players are focused on pursuing this subscription business model. The attractiveness of subscriptions is driving the market’s higher growth rates. The pandemic of COVID-19 has accelerated the development of online and digital platforms for business-to-consumer transactions. OEMs and market leaders have begun to virtualize their dealerships or agreements and work remotely in response to these developments.
Key Market Players
Some of the Key Market Players in the Global Car Finance Industry include
Ally Financial Inc. is a corporation that provides digital financial services. The business is a financial holding company and a bank. Automotive Finance operations, Insurance operations, Mortgage Finance operations, Corporate Finance operations, and Corporate and Other are among the company’s divisions. Automotive Finance operations offers automotive financing services to customers and automotive dealers in the United States, as well as automotive and equipment financing services to businesses and municipalities.
Bank of America Corporation is a financial holding company as well as a bank holding company. The Company is a financial institution that offers a variety of lending, trading, wealth management, and other financial and risk management products and services to individuals and businesses. The Company offers a variety of banking and non-bank financial services in the United States and in foreign markets through its banking and non-bank subsidiaries.
Capital One Financial Corporation is a holding company for a variety of financial services. Via branches, the Internet, and other distribution networks, the Company and its subsidiaries provide a variety of financial products and services to customers, small businesses, and commercial clients. Credit Card, Consumer Banking, Commercial Banking, and Other are the company’s divisions.
Chase Auto Finance Corp. is a company that offers financial services. Auto loans are available through the company. Customers in the United States are served by Chase Auto Finance.
Daimler Financial Services Private Limited provides automotive financial services. The company provides leasing and financing solutions for dealer firms as well as commercial fleet management, as well as insurance, finance, and mobility services. Daimler Financial Services has clients all over the world.
Ford Motor Credit Company LLC provides automotive financing services. The Company offers retail installment sales, lease contracts, and direct financing to retail customers, government entities, and corporations.
Ameri Credit is a division of General Motors Financial Company, Inc. that offers auto financing. The company provides retail vehicle customers with buying, leasing, and servicing options, as well as commercial lending products to dealers to help them expand their companies. Customers in the state of Texas are served by Ameri Credit.
Hitachi Capital Corp is a company headquartered in Japan that specialises in financial services. Six market divisions make up the company’s operations. Leasing, instalment, insurance, and trust services are provided by the Account Solution division to meet the needs of businesses and government agencies. The Vendor Solution section offers financial services such as leasing and instalment to related vendors in order to meet their sales promotion needs. Customers and vendors in each area are served by the European section, the Americas segment, the China segment, and the ASEAN segment. The company is also active in the transformation of corporate structures focused on business growth.
Toyota Financial Services Corporation is a financing company. The Company finances car loans for customers of the Toyota Corporation. Toyota Financial Services operates worldwide.
Volkswagen Financial Services is a company that offers financing for automobiles. Vehicle finance, insurance, leasing, fleet management, and rental solutions are all available through the company. Volkswagen Financial Services caters to consumers all over the world.
The Global Car Finance Industry is at the cusp of growth and is expected to witness significant growth once the COVID-19 Pandemic sets in primarily driven by the transformation strategies such as digitalization and introduction of new age technologies such as Blockchain, Artificial Intelligence and Machine Learning technologies adopted by the industry players. The Car Finance Industry offers a plethora of opportunities for new entrants including Mobility as a service, Emergence of new business models and Implementation of technologies in existing product lines.
- AI – Artificial Intelligence
- ML – Machine Learning
- MaaS – Mobility as a Service
- P2P – Peer-to-Peer
- OEMs – Original Equipment Manufacturers