Car Finance Market

Market Overview

The global car finance market size was valued at USD 1,109.5 million in 2022. It is expected to reach USD 3665.41 million by 2031, growing at a CAGR of 14.2% during the forecast period (2023–2031).

Car finance is a sum of money consumers borrow to purchase a car. It offers the choice of buying the vehicle upfront and paying for it later in equal monthly installments. Car financing also depends on several variables, including the borrower's income, credit score, and credit history. The main distribution channels for car financing solutions include banks, original equipment manufacturers (captive finance), financial institutions, and credit unions. A borrower can also expressly apply for a car loan, although most people choose personal loans to finance their cars because they often adhere to the same guidelines and processes as other loans.

Market Dynamics

Global Car Finance Market Drivers

Increasing Global Average Vehicle Price

Increased global demand for new car models and branded vehicles has emerged as one of the key market growth drivers. The need for car financing and loans is anticipated to increase and is expected to maintain its dominance in the market as consumer trends and preferences toward car purchases have increased tremendously. As a result, the average price of cars has increased globally, along with the demand for automobiles. Due to the dramatic increase in vehicle prices, consumers are urged to use market-based auto or car financing instead of making direct purchases.

Increased Demand for Automobiles

The market's main growth drivers are the expansion of advanced benefits from online applications for auto financing and the availability of various vehicle purchasing options. Additionally, the increased consumer disposable income causes a huge demand for car purchases. The expansion of foreign automakers like Volkswagen, Mercedes, BMW, and Toyota satisfies global consumer demand. For instance, even though car prices in India tend to increase year over year, about 75% of cars are bought using loans or other forms of financing, which is expected to drive market growth over the forecast period.

Global Car Finance Market Restraints

Increased Use of Ridesharing Services

An increase in alternatives to driving a car slows market expansion. Owners of vehicles offer rides to customers who pay them in exchange for quick trips. As a result, there is little need for car financing among auto financing companies and commercial vehicle loan providers.

Rising Debts owed to Various Borrowers

Mismanaged debts have a negative impact on borrowers' mental health in addition to their financial well-being. Therefore, it is anticipated that the rise in debt and loans will constrain the growth of the auto finance market. The ability of car finance companies to offer loans in this market is also hampered by consumers having long-term debts like home loans.

Global Car Finance Market Opportunities

Technology Integration into Current Product Lines

Car finance companies are concentrating on providing value-added services to their customers. By implementing technologies like artificial intelligence, business analytics, and blockchain, they are extending their current product and service offerings, which is expected to help improve service quality and raise customer satisfaction. Additionally, these technologies enable businesses to structure new and used auto loans more precisely. Therefore, expanding current products and services through new technologies will likely offer lucrative opportunities for car finance providers in the coming years.

Potential of Developing Countries

Customers from significant emerging and developed economies prefer to finance their cars through licensed financial institutions to eliminate any risk or discrepancy in the transaction process. As a result, there should be a lot of opportunities for car finance companies in developing economies. In addition, due to the increased availability of long-duration repayment options that range from 3.5 to 4 years, countries like China, India, Japan, and Australia have a high demand for and frequently request quotes for car loans or financing. Thus, Asia-Pacific is seeing an increase in the benefits associated with repayment options for car loans, which is expected to present enormous opportunities for key players over the forecast period.

Regional Analysis

By region, the global car finance market is segmented into North America, Europe, Asia-Pacific, and LAMEA.

Asia-Pacific Dominates the Global Market

Asia-Pacific is the most significant shareholder in the global car finance market and is expected to grow at a CAGR of 15.5% during the forecast period. China, Japan, India, Australia, South Korea, Indonesia, and the rest of Asia-Pacific are all included in the analysis of the Asia-Pacific market. It is regarded as the region with the fastest growth globally due to its growing middle class, developing economy, and expanding population. Due to the region's rising disposable income and widespread middle-class affordability for car financing, the Asia-Pacific region is predicted to experience rapid growth in this market. Additionally, Asia-Pacific has a lower penetration of car leasing and financing due to increased fleet outsourcing and private leasing of vehicles.

Europe is expected to grow at a CAGR of 13.5% during the forecast period. Germany, the UK, France, Italy, Spain, Russia, and the rest of Europe are all included in the European market analysis. Europe has seen substantial expansion as a result of a significant concentration of auto finance businesses. Car finance providers in the area concentrate on offering insurance, maintenance, and fleet services because these are essential for ensuring safe travel and raising consumer awareness of car financing. These elements have increased people's awareness of car financing options growing demand for car financing in the area.

Additionally, by providing flexible digital services, numerous European startups have significantly altered how car financing is done quickly and easily. The automotive sector creates many employment opportunities across several European nations and is crucial to the continent's economic development.

North America is expected to grow significantly over the forecast period. The car finance industry is expanding in the United States, which has led to massive purchases of subscription plans or car-buying packages nationwide. Additionally, the COVID-19 pandemic's unprecedented spread increased the need for independent personal mobility as people seek protection from the coronavirus health crisis. All these factors are anticipated to increase consumer demand for cars, especially for compact, affordable, and fuel-efficient models, which would speed the growth of the local auto finance sector. For nearly a century, one of the main economic drivers in North America has been the sale of cars. Car financing is one of the main factors that influence auto sales. An unprecedented rate of change is taking place in the auto finance operating environment.

Latin America and the Middle East and Africa are all included in the analysis of the LAMEA market. The Latin American auto finance market is anticipated to expand over the forecast period. The increase aids the growth of auto financing in light vehicles. Higher purchasing power is also a result of household income growth and improved employment prospects. Most consumers are financing a more significant portion of the vehicle's value, which raises the auto loan default rate.

Additionally, the availability of low-interest ESR and no down payments presents a significant opportunity for young people in developing countries with low disposable income to purchase cars. The market for auto financing in Latin America is predicted to grow rapidly as more nations concentrate on NBFC expansion, enhanced credit assessment, and captive finance activities following the lockdown.

Segmental Analysis

The global car finance market is segmented by distribution channel, vehicle age, application, and purpose.

By Distribution Channel Analysis

Based on the distribution channel, the global market is bifurcated into banks, OEMs, and credit unions.

The OEM segment is the highest contributor to the market and is expected to grow at a CAGR of 15.6% during the forecast period. An original equipment manufacturer (OEM) is a business that creates semi-finished products for another business, which then markets the finished goods to consumers. OEMs collaborate with captive finance firms to provide car sharing, short-term rentals, and vehicle financing and leasing services. In addition, OEMs manufacture aftermarket parts, and car or auto financing is carried out immediately during market sales. The original equipment manufacturers (OEMs) are implementing new funding and business models in the auto finance industry to cut costs and enhance the customer experience.

A significant portion of the market's offerings for car financing comes from banks. Banks have contracts with several auto dealers and manufacturers and divide commissions with the partnered companies when cars are purchased through financing. Banks typically offer individual auto and personal loans covering car financing to businesses and consumers. Customers frequently purchase car loans and finances from banks due to the availability of car financing at a discounted rate, which spurs the growth of the car finance market. Easier loan approval processes, prompt services, and loyalty to sanctioned loans are critical drivers in the banking segment over the forecast period.

By Vehicle Age Analysis

Based on the vehicle age, the global market is bifurcated into new vehicles and used vehicles.

The new vehicles segment owns the highest market share and is expected to grow at a CAGR of 14.2% during the forecast period. New vehicles have never been registered in the market or owned by a single person. Additionally, new vehicle owners must purchase long-term third-party auto insurance for cars valid for three or five years. Manufacturers, distributors, or dealers offer numerous features to customers who finance new cars because they have numerous connections to other market players. A manufacturer or dealer transfers a new vehicle to a customer for the first time. New vehicle sales growth via car financing in the market is driven by demand for customized financing options for auto loans and additional bundled products like insurance and discounts.

A vehicle previously owned by a retailer is referred to as a used or secondhand car. Various channels are frequently used to sell used cars, including independent auto dealers, rental car agencies, franchises, leasing offices, and auctions. However, compared to new cars, used cars have shorter financing terms and frequently higher rates. Additionally, a used vehicle is any car driven further than its initial, limited use before being delivered to a customer. The main drivers of the market's expansion are the rising demand for used cars with customized models, the constrained availability of car loans, and shifting business preferences for vehicles.

By Application Analysis

Based on the application, the global market is bifurcated into personal vehicles and commercial vehicles.

The personal vehicles segment is the highest contributor to the market and is expected to grow at a CAGR of 14% during the forecast period. Individuals use personal vehicles for their own needs and purposes, typically designed to seat no more than nine people and are intended for passenger transportation. It primarily entails using automobiles for daily personal activities. This segment's car loans assist people in managing significant losses brought on by unstable finances. The demand for sports utility vehicles, pent-up demand, and rising production have all contributed to a month-over-month rise in personal vehicle sales.

Commercial vehicles are licensed to transport goods or materials rather than people and are used for this purpose. There are different types of commercial vehicles, such as light trucks, medium trucks, and heavy trucks. Additionally, preferences for car financing under commercial or business vehicles are primarily geared toward a cost center rather than a profit center. As automakers make financing options accessible to the market, demand for commercial vehicles continues to grow. Commercial vehicle financing has increased significantly due to the rise in supply chain services across industry verticals and small business startups that require commercial vehicles.

By Purpose Analysis

Based on purpose, the global market is bifurcated into loans and leases.

The loans segment owns the highest market share and is expected to grow at a CAGR of 13.4% during the forecast period. A loan is a sum of money given to someone else with the expectation that it will be repaid. For loans to banks or other financial institutions, borrowers must pay the principal amount plus interest. Additionally, lenders of auto loans implement market-based security through collateral like a mortgage and credit card. Further, all parties involved in the loan process for purchasing cars have agreed to the loan terms and conditions. A significant trend in the market is the evolution of customer expectations and the simplification of loan applications through mobile applications. The market for car finance is expanding as more people apply for car loans online, especially for used or pre-owned vehicles.

An agreement to rent a piece of property owned by another party is known as a lease. The lessee can frequently purchase the vehicle from the lessor for a predetermined cost. Additionally, buying cars on personal leases is becoming more and more common. A lease buyout loan enables the buyer to keep paying the lender until the lessee owns the vehicle. Key market trends include shifting consumer preferences, alternative leasing services, and expanded business programs. Some key growth drivers in the auto finance market include the expansion of FinTech companies offering online leasing services and the expansion of government regulations to encourage lender transparency.

Recent Developments

• October 2022- Ally Financial Inc. formally unveiled new partnerships with the Detroit Pistons and Charlotte Hornets ahead of the 2022–2023 professional basketball season.
• December 2022- Honda Cars India (HCIL) announced a tie-up with Indian Bank to provide its customers with easy, affordable, and attractive financial schemes. Notably, Indian Bank has a strong presence across the country.