Auto Finance (2)
Content
SHERMEEN KHAN 00923125142366 [email protected] Shermeen35
Should economists fear auto lending as a characteristic of an increased appetite for risk in an economy?
1.0 1.1
Literature Review Area of Research
Research is being conducted to evaluate auto financing practices. Companies are engages in financing and leasing automobiles. The research is focused on the risks to which economy is exposed as a result oh extensive auto financing. Although auto financing is beneficial for the companies engaged in auto financing, yet the while economy faced some issues as a result of practices of auto mobile companies. The research focuses on the issue that how auto financing is contributing to the economy. Loan is a kind of debt. A loan involves repayment of financial assets between lender and borrower of loan. Borrower receives loan from the lender which is called “Principal” amount. This principal amount has to be repaid after a certain time period. Usually the amount of loan is repaid in the form of regular installments. Installments are of equal amount, such transaction is called annuity. Lenders provide loan on a cost which is called “Interest”. The interest is basically a kind of income for the lender and expense for borrower. Different kinds of loans are offered by the lenders. Auto loan is one of such kinds. 1.2 Auto Loan
Auto loan is a loan which is granted for buying a car or vehicle. It also consists of principal payment and interest payment. Auto loan is basically of two types. One is direct auto loan and the other one is called indirect auto loan (Michael, 2007). A direct auto loan is a kind of loan in which bank or any other financial institution pays money to the customer for purchasing car. In case of indirect auto loan car dealerships act as intermediary between banks and customers (Evans, 2008).
1.3
Certificates of Automobile Receivables (CARs)
Certificates of Automobile Receivables (CARs) are basically securities which are collateralized by the loans that are given to customers for purchasing cars. Auto loans have short maturities usually between 2 to 5 years. These loans are self amortized. CARs are characterized bimonthly or quarterly fixed interests and principal payments. The cash flows of CARs are similar to that of a corporate debt. These securities are very popular in the public and financial institutions. Furthers collateral securities are issued on the basis of CARs. The maturity period of CARs is usually 3 to 5 years (Frank, 2002). The servicing fee on CARs is high as compared to other mortgage based securities. CARs require more monitoring in contrast with asset based securities. 1.4 Auto Loan Securitization
Securitization is a process that deals with collection of various kinds of contractual debts which include property mortgages, commercial mortgages, auto loans and credit card obligations. A particular interest is charged on the debt which is paid back to the investors after a regular interval of time. Auto finance is very important form of consumer finance. A large number of autos have been sold in the last decade as a result of auto financing (Frank, 2008). Auto financing has facilitated sale of automobiles to a great extent. Different modes of auto financing are described as follows: • • • • • Secured Loans Financial Leases Conditional Sales Operational Leases Hire Purchases
Auto securitization deals with the entire above auto financing modes except operational leases. Operational leases are different modes of financing in terms of risks and cash flows. Auto backed securitization has been a very important part of Asset Backed Securitization. Auto loan markets have spread all over the world. In Asian countries financial companies are intensively working on auto loan securitization. Securitization of auto loans started since 1985 (Stuart, 2007). Auto loan
securitization was the largest segment of asset backed securities at that time. Securitization of auto loan is basically the securitization of retail installment contracts. On this king of loan interest is paid on monthly basis and the maturity time of loan is almost 60 months. The prepayment speed in auto loan securitization market is based on absolute prepayment rate. This rate is basically the percentage of loan which is to be paid backed in installments (Stuart, 2007). Auto loan securities are the oldest form of asset backed securities. Following authorities are responsible for issuance of auto loan backed securities: • • • Financial subsidiaries of auto manufacturers Commercial Banks Financial companies that are focused on auto loans
Auto loan market depends upon the credit worthiness of borrowers. Credit worthiness of prime loans is high as compared to other types of loans. Prime loans are issued by subsidiaries of auto manufacturers. These loans are of high quality because the y are secured loan. Second reason is that their repayment instantly. Another reason of their high credit worthiness is that their maturity time period is short. Some issues are highlighted by financial analysts regarding auto loan securitization (Vinod, 2006). First legal issue is that whether sale through auto finance is true sale or not in legal terms. This is because the ownership of vehicle is registered in the name of inventor. The physical ownership of the asset is transferred to the borrower. Another legal issue is raised in auto loans that whether there are some obligations like insurance obligations or environmental obligations or not. 1.5 Cash Flows of Auto Loans
The cash flows of auto loans comprise of monthly installments which include interest and principal prepayments. Prepayments of auto loans result from (1) trade-ins that require full payoff of the loan, (2) repossession of autos in case of defaults, (3) resale of autos, (4) damage of autos, (5) refinancing of loan (6) from payoff of loans. In the whole cycle cash flows arising from repossession and resale of autos are of critical nature. These cash flows are very common in an economy which is undergoing recession. Interest rates on auto loans are low as compared to other kinds of loans because they are levied by manufacturers as a promotional tool. Major cash flows in case of auto loans arise from refinancing (Frank, 2002).
1.6
Auto Lease
Lease agreement can be defined as an agreement in which customer pays no down payment and gets restrictions of mileage. If the restrictions are crossed, customer is charged extra money. Interest charge and depreciation charge are included in lease payment. Depreciation is calculated on the basis of mileage that has been covered by the auto. Customer can either return or buy the car at depreciated value at the end of the lease agreement (Kobliner, 2009). Lease has become very popular mode of financing over the last two decades. A number of companies are engaged in easing their equipments. Leasing mode of financing is very important source of cash flows for the companies. Lessees have advantage in ease agreement that they can invest money in any other business rather than in depreciating asset which will be useless in the future (Mollaghasemi, 1995). It is very important to consider costs of vehicles during the leasing period because many indirect costs are involved in it. Leasing agreement is a flexible mode of financing. There are basically two modes of leasing. One is close ended leasing in which lessor has to bear the cost of depreciation. The other one is open end leasing agreement in which lessee is made responsible party to manage market value of asset at the time of its sale. 1.7 Auto Repossession
Repossession is an activity in which financial institutions repossess or take back the assets which are either rented or leased. The party which has ownership of asset has the right to repossess the asset or property without appealing to the court. At the time of leasing the asset lessor or creditor is given specific rights which remain valid until the lease obligation is not paid. These rights are finalized with the mutual consent of lesser and lessor. The court establishes and imposes these rights. If lessee commits any default or does not pay installments, lesser has right to repossess the asset. Companies that are involved in leasing assets have reported record business in the recent past. Auto loans are the important source which resulted in repossessions of assets by the
companies. In year 2008 there was 10 % in crease in the repossession of autos by the companies (Melody, 2008).
1.8
Secured Loans
A secured loan is a kind of loan in which asset is kept as pledge by the borrower as a security for the loan (Debby, 2008). This asset can be property, car, or any other asset. Secured loans are characterized by low rates of interests than unsecured loans because they are backed by securities. Rates of interests are also affected by other factors like credit history, market conditions, expected returns and ability to repay the loan. Secured car loans are those loans which are backed by some securities. The assets which are kept as security can have more or less value than that or car. This security allows creditor to repossess the car in case of any default from borrower side. Secured car loans allow customers to purchase the car even if they have less income. Secured car loans allow customers to borrow large amounts of loans equal to the value of security. The assets kept as security allow borrower to set terms of repayment. Secured loans are more flexible as compared to other kinds of loans. Borrowers who have less income can get secured loans easily by keeping assets as collateral. In case of secured car loans, lenders do not hassle to repossess the car in payment is delayed or any other issue occurs. 1.9 Unsecured Car Loans
An unsecured car loan is a kid of loan in which is not backed by any kind of security (Debby, 2008). The lender gives car loan on the basis of credit history of borrower. In case of unsecured loans different kinds of issues arise such as bad credit, non payment of installments by the borrower. In these loans lender takes the risk and imposes some hard rules on the borrower. This is the reason such loans are not easy to get. Borrowers have to be credit worthy person in order to get unsecured loans. Lender investigates the credit history of borrower and then grants unsecured loans in order to avoid any kind of defaults. These loans carry higher interest rates because they are not backed by any security. It brings financial load on the borrower. If any delay in the payments occurs, lenders can ask for repossession of asset because they have concern about their
investments. So it is important for borrowers to pay installments on time. Some of the benefits of secured loans are given as below: • • • • Secured loans do not require any kind of security. These loans are beneficial for students or other persons who do not have any assets to be kept as security. Process to get unsecured loan is easy as compared to other traditional kinds of loans. Credit history is analyzed and loan is granted to the customers in short time. Unsecured loans can be extended by increasing installments and keeping the interest rates low. In case of poor credit history, unsecured loans are difficult to get. It can be easy to get secured loans if borrower makes reasonable down payment to the lender. 1.10 Research Questions
Research questions are designed to narrow down the topic of research. The foundation of whole research is based on research questions so it is important to design accurate research questions. Research questions designed for this particular research are as follows: • • • • • What is auto finance and what are different modes of auto financing? What are the factors that influence customers to take a particular type of auto loan? What are benefits of different auto loans? How do interest rates affect decisions of borrowers to take auto loans? What kinds of risks are exposed to the market as a result of vigorous auto financing schemes? What steps government can take regarding auto finance industry?
Chapter Three Research Methodology
3.1
Introduction
Developing a theory, explaining a phenomenon, or extending an existing theory all are the examples of research. Social research is a type of research which involves explanation of behaviors of societies (Pan, 2011). Research requires specific situations and paradigms. Each research is conducted by a specified research methodology. Different kinds of research methodologies produce different results. It is very important to interlink research methodology and research aims and objectives (Hatch and Cunliffe, 2006). This chapter presents details and justification of research methodology. Research philosophy, approach, data collection techniques and research ethics are discussed in this chapter of research. 3.2 Research Philosophy
Research philosophy creates background of the research and determines conditions in which research is being conducted. Blaikie (2000) says that research philosophy must be interlinked with the research aims and objectives. There are fur main kinds of research philosophies. These are realism, positivism, Interpretive or Social Conservatism and pragmatic philosophy of research. Realism philosophy of research deals with the explanation of existing theories and models. Pragmatic research philosophy decides about the solution of problems. The positivism philosophy of research decides about the social values. Interpretive or Social Conservatism deals with the social behaviors. This particular research is being conducted by adopting positivism philosophy of research. Positivism philosophy deals with the explanation of existing theories and models. The affect of auto financing on the consumers and perceptions of consumers about auto financing can be best explained through positivism philosophy of research. The aims and objectives of research can be properly defined with the help of positivism philosophy of research. The realism philosophy deals
with the experimentations which is not objectives of this research. Interpretive or Social Conservatism and pragmatic philosophies do not match with the aims and objectives of research so they are avoided. 3.3 Research Approaches
There are two types of research approaches. One is called inductive approach and the other one is deductive approach of research. Deductive approach of research deals a phenomenon from general to the specific point of view. Inductive research approach deals from specific to a general point of view. Deductive research approach explores existing theories and models and reaches at a specific point of view whereas inductive research approach constructs theories on the basis of observations (Saunders et al., 2009). This particular research is being conducted by incorporating both approaches of research. Deductive research approach deals with the construction of literature review of research whereas inductive research approach fids the impact of auto loans on the economy and investigates perceptions of customers about auto loan products. These both approaches are important for the complete explanation of research aims and objectives. 3.4 Research Method
There are two methods of research. These are qualitative and quantitative research methods. Qualitative research methods deal with the explanation of behaviors and perceptions of individuals of society. Qualitative research methods explain research problem in the form of words. On the other hand quantitative research methods explain research phenomenon in numeric form. Quantitative research methods involve statistical operations on data (Saunders et al., 2009). There is another research method which is called triangulation research method or mixed method. Triangulation research methodology is combination of qualitative and quantitative research methods (Denzin, 1970). This type of research methodology is beneficial as compared to the single methods because it compares secondary and primary data. This particular research is conducted by triangulation research methodology. Literature review of research is constructed with the help of qualitative research methodology. Existing research work regarding auto financing is investigated with the help of qualitative research methods. Quantitative research methods are used to analyze
the findings of survey. The use of triangulation methodology establishes strong base of research. Primary data is compared with the secondary data and relation is developed. 3.5 Data Collection Techniques
Two types of data are used in the research. These are primary and secondary data. Primary data is the first hand data. It is collected for the first time and does not exist in the literature. Secondary data already exists in the literature in books, articles and journals. Primary data is the first hand data so chances of biasness in this data are less as compared to the secondary data which is processed form of data. Primary data is also called fresh data. There are various kinds of tools fro the collection of primary data. Primary data can be collected through questionnaire survey, interviews, and focus group discussions or through observations. In observation technique researcher observes attitudes and behaviors of a particular group. This technique of data collection is very narrow and does not produce accurate results. Questionnaire survey technique is used to find the characteristics of a large population in short time. Survey is flexible and cost saving tool of primary data collection. Interaction of researcher is very low during the survey so chances of biasness in the results are very low. During interviews researcher directly asks questions from the respondents. This technique data collection is used at places where researcher has to ask some detailed queries. Interaction of researcher with the respondents is high so the results produced can be biased. Interviews require higher cost and proper arrangement to be conducted. The results of interviews are of high quality as compared t that of surveys which can produce vague responses. A focus group consists of six to twelve persons. A trained mediator is appointed in order to ask questions from the participants of focus group. Participants are asked to present their point of view regarding the subject of discussion. They are asked to describe whatever comes in their minds. In this way it can be said that focus group discussions are natural discussions. It can happen that focus group discussions produce biased results because of interaction of mediator with the respondents. Focus group dissuasions are costly and require proper arrangement. On the basis of pros and cons of all data collection techniques, researcher has adopted questionnaire survey technique for this particular research. A questionnaire is developed to conduct survey. Focus group discussions and interview techniques are not adopted for this particular
research because they are costly for the research. Observation technique does not match with the aims and objectives of the research so it is not adopted for this particular research. 3.6 Population and Sample
All the individuals who are targeted in a particular research are called its population. In this particular research population comprises of all the individuals who are customers of auto makers in United Kingdom, UAE and Pakistan. It is not possible for the researcher to collect data from all customers of automakers in these countries. For this purpose researcher has selected a representative part of population which is called sample. Sample provides convenience saves time during data collection. The researcher has selected a sample of 100 customers of automakers from UAE, UK, and Pakistan. 40 customers have been selected from UK, 30 from UAE and 30 from Pakistan. There are two types of sampling techniques. These are probability and non probability sampling techniques. Probability sampling technique enables each member of population to be selected in sample whereas non probability sampling technique does not give equal chance to all members of population to be selected as a member of sample. Researcher has adopted convenience sampling technique which is basically a form of non probability sampling technique. In convenience sampling technique researcher collects data from individuals who are easily assessable. Probability sampling technique is not used because it is very complex.
Analysis of Data: Introduction
4.1
Introduction
Primary data for the research is collected through a survey. 100 % response rate has been achieved in the survey. This chapter percents the data and analyses it critically. Results of each section of questionnaire will be discussed in detail and compared to the literature review. 4.2 Findings of Questionnaire
Mode of Auto Purchase: Respondents were asked to identify the mode of auto purchase. They were given two options. One was cash and the other one was auto financing. Respondents were directed to fill the rest of questionnaire if they selected auto financing as mode of auto purchasing. The results show that 38 % respondents purchase auto through cash whereas a large proportion of respondents selected auto financing which is objective of this research. The respondents who purchase cars on cash said that they prefer cash purchase of cars because it charges less cost to them. Some of the respondents said that they prefer cash purchasing of Auto because financing takes more time and it is not flexile tool of financing. The respondents who purchase cars through auto loans prefer this mode because it is convenient for them. Some of the respondents have shown that they prefer auto financing because they cannot afford cash cars. Graphical representation of the results is a follows:
Demographics of Respondents:
To evaluate the demographics of the sample researcher has asked about the gender, age, education, profession, income and accommodation of respondents. Gender: The results of the demographics show that there were 54 % males and 46 % females in the sample. It can be deducted that males have more interest in cars as compared to females. Other deduction made from the frequency distribution of sample in terms of age is that males prefer to take part in survey as compared to females. The graphical presentation of frequency distribution of gender of respondents is as follows: Age: The results of the frequency distribution of age of respondents show that 5% respondents were of less than 25 years old. 17% respondents belonged to 25 – 35 years age class. There were 40 % respondents who were between 36 – 45 years of age. 27 % respondents were between 45 – 55 years of age. There were 11 % respondents who were above 55 years of age. The results suggest that most of the respondents who take interest in car purchasing belong to middle age category i.e. 36 – 45 years. Individuals of this age category are in their mid careers so they can afford purchasing cars. Individuals who are less than 25 years of age have just started their careers so they cannot afford luxuries in this age. On the other hand individuals who are older in age prefer to save money rather then spending on luxuries so they are also less in proportion in the sample. The graphical presentation of frequency distribution of age of respondents is as follows: Education: Results about the education of respondents show that 7 % respondents had education of high school diploma. There were 19 % respondents who have completed undergraduate program. 34 % respondents have completed graduate program. There were 29 % respondents who have completed Masters Degree. 11 % respondents have received Doctorate Degree. The graphical presentation of frequency distribution of education of respondents is as follows:
Profession: Respondents were asked to mention their profession. The results show that there were 30 % businessmen and 70 % salaried persons in the sample. Most of the salaried persons take auto loans whereas businessmen prefer to purchase cars on cash basis. The graphical presentation of frequency distribution of profession of respondents is as follows: Income: Results about the income level of respondents how that there were 8 % respondents who had income of less than £5000. 17 % respondents were in income range of 5001 to 20000 £. There were 40 % respondents who were in 20001 – 400000 income range. 26 % respondents belonged to 400001 – 60000 income class. 9 % respondents belonged to 60001 – 90000 income class. None of the respondents had income level of more than £ 90000. The deductions made from the frequency distribution of sample in terms of income is that most of he respondents who have middle income category take interest in purchasing cars through loans. The graphical presentation of frequency distribution of income of respondents is as follows Accommodation: The results about the accommodation of respondents show that there were 34 % respondents who have their own accommodation. 46 % respondents live in rented accommodation. There were 23 % respondents who reside in other than their own and rented accommodation. These respondents either lived in company’s owned house or share the accommodation with their friends or colleagues. The graphical presentation of frequency distribution of accommodation of respondents is as follows Prefer Mode of Auto Financing: Respondents were given two choices for choosing mode of auto finance. The choices were: Auto loan and auto lease. The results of this question show that 57% respondents prefer auto loans whereas 43 % respondents prefer auto lease. The respondents who chose auto lease said they get tax benefits in their business by this mode of auto finance. Respondents prefer auto loan because it is less expensive as compared to auto lease. Kevin (2008) suggests that auto lease works better when individuals want to replace the car every 2 to 3 years. He further suggests that individuals
who want to have long term benefit should purse auto loan. The results of the question are graphically represented as follows: New, Current or Previous User of Auto Financing: Respondents were asked to sows the duration of using auto financing. They were given three suggestions. These were new, current, and previous. The results of survey show that there were 19 % respondents who were new users of auto finance. 39 % respondents were current and 42 % respondents were previous users of auto finance. It can be deduced that in the past auto finance was at boom so most of the respondents acquired auto finance at that time. In current time auto finance is not as much as it was in the past, so new users of auto finance are less. The results of the question are graphically represented as follows: Interested in Financing New Car or Used Car? Respondents were asked that whether they have interest in financing new car or used car. The results of the survey show that 45 % of the respondents have interest in financing new car whereas 55 % respondents have interest in financing used car. Financing a new car involves higher cost whereas financing a used car involves less cost. This is the reason most of the respondents prefer financing used car. In financing an old car expenses like deprecation, insurance, maintenance, and taxes are less. If a person finances a new car then all the above expenses will be higher for the same mileage (Kiplinger, 1990). This is the reason most of the respondents prefer to finance a used car. The results of the question are graphically represented as follows: You consider your auto financing decision? Respondents were asked to identify that how do they decide for the auto financing. 39 % respondents said that first they plan and then decide about auto financing. There were 12 % respondents whose decisions about auto finance were of impulsive nature. 19 % respondents said it was hard to resist auto financing so they decided to adopt it. 20 % respondents had best option for purchasing auto in the form of auto financing. 10 % respondents have market others option. In others option, most of the respondents specified that their relative or friends have recommended them to choose auto financing. Auto financing affects cash flows of individuals for a number of
years so it is very important for customers to take rationale decision about auto financing. The results of the question are graphically represented as follows: Do you consider your Auto financing decision? Respondents were asked to identify the worth of their decision about auto financing. 57 % respondents consider their decision as beneficial. 43 % respondents consider their decision as non beneficial. It is very important to mention that respondents who plan for the auto financing decision consider their decision as beneficial whereas respondents who take decision either impulsively consider their decisions as non beneficial. It can be deduced that planning is very important for taking decision about auto financing. The results of the question are graphically represented as follows: Any other mode of financing, you are availing? Respondents were asked to mention that whether they are availing any other mode of financing or not. 76 % respondents said that they do not avail any other mode of finance. 24 % respondents avail other modes of financing rather than auto loan and auto lease. Most of the respondents said that they have purchased car on credit in the past. The results of the question are graphically represented as follows: Have you ever been defaulted? An optional question was asked that whether the respondents have ever been defaulted or not. The results of the survey show that 33 % respondents said that they have been defaulted in the past. 67 % respondents said that they have never been defaulted for auto financing. The respondents who had taken decision about auto finance impulsively said that they have been defaulted. On the other hand respondents who take decision after proper planning have not been defaulted for auto financing. The results of the question are graphically represented as follows:
Customer Preferences In the questionnaire some questions about customer preferences were asked. Respondents were asked to identify their preference about secured or unsecured lending. 52 % respondents said that they prefer secured lending because it involves lower rate of interest. O the other hand 48 % respondents said that they prefer unsecured lending because they do not have any asset which can be kept as collateral. In case of secured loans lender is secured for the amount kept as security whereas in case of unsecured loans lender does not take any security from borrower. Unsecured loans present risks for the borrower so to compensate that risk they charge higher rate of interest. Borrower selects secured or unsecured loan depending upon his or her financial strength. The results of the question are graphically represented as follows: Your opt Auto financing to… Respondents were asked to mention that why do they opt auto financing. 45 % respondents said that they opt auto financing to buy their first vehicle. 27 % respondents opt auto financing to buy their second vehicle. There were 17 % respondents who said that they opt auto financing to change or upgrade vehicle. 11 % respondents identified other reasons for opting auto finance other than above mentioned reasons. The results of the question are graphically represented as follows: You prefer Auto financing product which offers… Respondents were asked to identify their preferences for the products of auto finance. 39 % respondents said that they prefer those auto finance products which offer them value. This value represents value of money. 24 % respondents said that they prefer those auto finance products which offer them less hassle. There were 11 % respondents who said that they prefer those auto finance products which offer them product quality. 15 % respondents favored customization. 9 % respondents said that they prefer those auto finance products which provide them value added services. 2 % respondents preferred some other reasons for preferring auto finance products. The results of the question are graphically represented as follows: Please rate your overall perception towards use of Auto financing in relation to auto industry & economy
Respondents were asked to identify their overall perception about auto financing in relation to industry and economy. 46 % respondents said that auto financing is beneficial for the whole economy whereas 54 % respondents said that auto financing is non beneficial for the economy. The results of the question are graphically represented as follows:
Chapter Five Conclusion
5.1
Introduction
Data collected through survey technique has been analyzed in the previous chapter. In this chapter all the findings of the research will be given conclusion shape. All the findings of the research are related to the secondary data which is presented in the literature review. On the basis of results recommendations are proposed. Limitations of the study are also listed in this chapter of research. 5.2 Conclusion
The results of the survey show that most of the respondents who were salaried persons adopt auto financings. Respondents who had average salaries prefer to adopt auto financing rather than purchasing auto. Prefer mode of auto finance is auto loan as compared to auto lease. Auto loan is less expensive mode of auto financing as compared to auto lease (Kevin, 2008). Most of the respondents were previous users of the auto financing. New users of auto financing were less because auto financing has been reduced. Financing of a used is cheaper as compare to that of a new car so most of the respondents preferred financing old car (Kiplinger, 1990). Auto financing impacts cash flows of individuals for 2 to 3 years after acquiring the auto finance. It is important for the individuals to take decision about the auto financing after proper planning. It has been found in the results of survey that most of the respondents plan before taking decision about the auto financing. These respondents take rationale view of the situation and decide for appropriate mode of auto financing. Auto financing is proved beneficial to these respondents whereas it has been proved non beneficial to the respondents who do not plan for auto financing. The respondents who
plan before taking decision have not ever been defaulted whereas respondents who do not plan and decide impulsively about auto financing have been found defaulted. Most of the respondents have said that they prefer secure lending as compared to insecure lending. Secure lending is characterized by low interest rates so respondents preferred it. On the other hand respondents having low income prefer unsecured loan. It has been found that salaried persons prefer auto loan as compared to auto lease. Auto loans are less costly whereas auto lease is expensive mode of auto financing. Businessmen prefer auto lease because it offers them tax shield Kevin (2008). Auto financing is beneficial for the individuals who cannot afford to buy a new car. It allows persons having less income to have their own car. It has been found from the results that auto lease is best for the individuals who tend to replace their cars every 3 to 4 years. 5.3 Limitations
5.4
Recommendations
•
References: Frank K. Reilly, Keith C. Brown, (2002). Instrument analysis and portfolio Management
• • • • • •
G. L. Evans. (2008). Secrets of Auto Financing: Non-Prime Auto Financing and What You Should Know Before You Buy Michael R. Czinkota, Ilkka A. Ronkainen. (2007). International Marketing Frank J. Fabozzi, CFA, Vinod Kothari, 2008. Introduction to Securitization, John Wiley & Sons Stuart I. Greenbaum, Anjan V. Thakor, (2007). Contemporary financial intermediation. 2nd edition Vinod Kothari, (2007). Securitization: the financial instrument of the future, Volume 385 of Wiley finance series Mollaghasemi, Mansooreh, Pet-Edwards, Julia, and Gupta, Uma.(1995) engineering management, 42: 278-285 “A multiple criteria buy versus lease analysis for government contracts”, IEEE transactions on
• • • • • •
Melody Hoffman, (2008). Car repossessions highest in a decade Gerard McCormack (2004). Secured credit under English and American law. Cambridge University Press. pp. 16 Debby Fowles, (2008). Everything Personal Finance in Your 20s and 30s: Erase Your Debt, Personalize Your Budget, and Plan Now to Secure Your Future Kobliner, B. (2009). Get a Financial Life: Personal Finance in Your Twenties and Thirties. oxford: Simon and Schuster. Kevin Chappell, (2008), Auto Financing: Leasing versus Buying. Ebony, Vol. 63, No. Kiplinger's Personal Finance, 1990. Vol. 44, No. 10
Questionnaire Auto Financing
May we Know About You?
Name Address (optional) E-mail Phone (optional)
May we add you to our mailing list, which offers news and exciting products, promotions and surveys regarding services improvement?
□ Yes
□ No
1.
Your Preferred Mode of Auto Purchase?
Specify reason_________________
(Please Tick One)
□
Cash
B.
□
Auto Financing Specify reason _________________________
(If you selected option A, Please Answer only Section 3 below of the questionnaire)
2. Your Preferred Mode of Auto Financing? )
A. □ Auto Loan B. □ Auto Lease Specify main reason for preference _____________________________?
3.
Key Demographics:
A. Gender: B. Age:
□ Male □ Female □ <25 □ 25-35 □ 36-45 □ 45-55 □ >55 □ High school Diploma □ Undergraduate □ Graduate □ Masters □ Doctorate
C. Education:
D. Profession
E. Income Bracket (Monthly in £ )
□ Businessmen □ Salaried Person □ Other □ <5000 □ 5001 - 20,000 □ 20,001 - 40,000 □ 40,001 - 60,000 □ 60,001 - 90,000 □ >90,000 □ Owned □ Rented □ Other_________________
F. Accommodation:
4. Product Usage:
A. New, Current or Previous User of Auto Financing? B. Interested in Financing New Car or Used Car? C. You consider your auto financing decision? Chose Only One
□ New □ Current □ Previous □ New □ Used □ Planned □ Impulsive □ To hard to resist □ Best option available □ Other Specify? _____________________ __________________________________ □ Beneficial □ Not Beneficial Specify Reason_____________________________
D. Do you consider your Auto financing decision
E. Any other mode of financing you are availing?
□ Yes Please Specify ___________________________________ ___________________________________ □ No □ Yes Please Specify Reason? ____________________________ □No
F. Have you ever been defaulted? (optional)
5. Customer Preferences:
A. You Prefer…
□ Secured Lending (Low Markup) □ Unsecured Lending (High Markup) □ Buy your first Vehicle (Necessity) □ Buy Second Vehicle (for family usage) □ To change/upgrade Vehicle model (Luxury) □ Other Reason? _______________________ □ Value (Low Markup) □ Low Hassle (Fast Processing) □ Product Variety (More Vehicle Options) □ Customization (tenure, flexibility in repayment options etc.) □ Value added services (Insurance, trakker service etc.) □ Other, Specify? ________________________ ________________________________________ ________________________________________
B. Your opt Auto financing to…
C. You prefer Auto financing product which offers… (Choose most Preferred)
D. Would you like to suggest any room for improvement /options in your existing auto financing product?
6. Customer Perception:
Please rate your overall perception towards use of Auto financing in relation to auto industry & economy
□ Beneficial □ Not Beneficial Specify Reason______________________ __________________________________
Thank you for your Participation!
Should economists fear auto lending as a characteristic of an increased appetite for risk in an economy?
1.0 1.1
Literature Review Area of Research
Research is being conducted to evaluate auto financing practices. Companies are engages in financing and leasing automobiles. The research is focused on the risks to which economy is exposed as a result oh extensive auto financing. Although auto financing is beneficial for the companies engaged in auto financing, yet the while economy faced some issues as a result of practices of auto mobile companies. The research focuses on the issue that how auto financing is contributing to the economy. Loan is a kind of debt. A loan involves repayment of financial assets between lender and borrower of loan. Borrower receives loan from the lender which is called “Principal” amount. This principal amount has to be repaid after a certain time period. Usually the amount of loan is repaid in the form of regular installments. Installments are of equal amount, such transaction is called annuity. Lenders provide loan on a cost which is called “Interest”. The interest is basically a kind of income for the lender and expense for borrower. Different kinds of loans are offered by the lenders. Auto loan is one of such kinds. 1.2 Auto Loan
Auto loan is a loan which is granted for buying a car or vehicle. It also consists of principal payment and interest payment. Auto loan is basically of two types. One is direct auto loan and the other one is called indirect auto loan (Michael, 2007). A direct auto loan is a kind of loan in which bank or any other financial institution pays money to the customer for purchasing car. In case of indirect auto loan car dealerships act as intermediary between banks and customers (Evans, 2008).
1.3
Certificates of Automobile Receivables (CARs)
Certificates of Automobile Receivables (CARs) are basically securities which are collateralized by the loans that are given to customers for purchasing cars. Auto loans have short maturities usually between 2 to 5 years. These loans are self amortized. CARs are characterized bimonthly or quarterly fixed interests and principal payments. The cash flows of CARs are similar to that of a corporate debt. These securities are very popular in the public and financial institutions. Furthers collateral securities are issued on the basis of CARs. The maturity period of CARs is usually 3 to 5 years (Frank, 2002). The servicing fee on CARs is high as compared to other mortgage based securities. CARs require more monitoring in contrast with asset based securities. 1.4 Auto Loan Securitization
Securitization is a process that deals with collection of various kinds of contractual debts which include property mortgages, commercial mortgages, auto loans and credit card obligations. A particular interest is charged on the debt which is paid back to the investors after a regular interval of time. Auto finance is very important form of consumer finance. A large number of autos have been sold in the last decade as a result of auto financing (Frank, 2008). Auto financing has facilitated sale of automobiles to a great extent. Different modes of auto financing are described as follows: • • • • • Secured Loans Financial Leases Conditional Sales Operational Leases Hire Purchases
Auto securitization deals with the entire above auto financing modes except operational leases. Operational leases are different modes of financing in terms of risks and cash flows. Auto backed securitization has been a very important part of Asset Backed Securitization. Auto loan markets have spread all over the world. In Asian countries financial companies are intensively working on auto loan securitization. Securitization of auto loans started since 1985 (Stuart, 2007). Auto loan
securitization was the largest segment of asset backed securities at that time. Securitization of auto loan is basically the securitization of retail installment contracts. On this king of loan interest is paid on monthly basis and the maturity time of loan is almost 60 months. The prepayment speed in auto loan securitization market is based on absolute prepayment rate. This rate is basically the percentage of loan which is to be paid backed in installments (Stuart, 2007). Auto loan securities are the oldest form of asset backed securities. Following authorities are responsible for issuance of auto loan backed securities: • • • Financial subsidiaries of auto manufacturers Commercial Banks Financial companies that are focused on auto loans
Auto loan market depends upon the credit worthiness of borrowers. Credit worthiness of prime loans is high as compared to other types of loans. Prime loans are issued by subsidiaries of auto manufacturers. These loans are of high quality because the y are secured loan. Second reason is that their repayment instantly. Another reason of their high credit worthiness is that their maturity time period is short. Some issues are highlighted by financial analysts regarding auto loan securitization (Vinod, 2006). First legal issue is that whether sale through auto finance is true sale or not in legal terms. This is because the ownership of vehicle is registered in the name of inventor. The physical ownership of the asset is transferred to the borrower. Another legal issue is raised in auto loans that whether there are some obligations like insurance obligations or environmental obligations or not. 1.5 Cash Flows of Auto Loans
The cash flows of auto loans comprise of monthly installments which include interest and principal prepayments. Prepayments of auto loans result from (1) trade-ins that require full payoff of the loan, (2) repossession of autos in case of defaults, (3) resale of autos, (4) damage of autos, (5) refinancing of loan (6) from payoff of loans. In the whole cycle cash flows arising from repossession and resale of autos are of critical nature. These cash flows are very common in an economy which is undergoing recession. Interest rates on auto loans are low as compared to other kinds of loans because they are levied by manufacturers as a promotional tool. Major cash flows in case of auto loans arise from refinancing (Frank, 2002).
1.6
Auto Lease
Lease agreement can be defined as an agreement in which customer pays no down payment and gets restrictions of mileage. If the restrictions are crossed, customer is charged extra money. Interest charge and depreciation charge are included in lease payment. Depreciation is calculated on the basis of mileage that has been covered by the auto. Customer can either return or buy the car at depreciated value at the end of the lease agreement (Kobliner, 2009). Lease has become very popular mode of financing over the last two decades. A number of companies are engaged in easing their equipments. Leasing mode of financing is very important source of cash flows for the companies. Lessees have advantage in ease agreement that they can invest money in any other business rather than in depreciating asset which will be useless in the future (Mollaghasemi, 1995). It is very important to consider costs of vehicles during the leasing period because many indirect costs are involved in it. Leasing agreement is a flexible mode of financing. There are basically two modes of leasing. One is close ended leasing in which lessor has to bear the cost of depreciation. The other one is open end leasing agreement in which lessee is made responsible party to manage market value of asset at the time of its sale. 1.7 Auto Repossession
Repossession is an activity in which financial institutions repossess or take back the assets which are either rented or leased. The party which has ownership of asset has the right to repossess the asset or property without appealing to the court. At the time of leasing the asset lessor or creditor is given specific rights which remain valid until the lease obligation is not paid. These rights are finalized with the mutual consent of lesser and lessor. The court establishes and imposes these rights. If lessee commits any default or does not pay installments, lesser has right to repossess the asset. Companies that are involved in leasing assets have reported record business in the recent past. Auto loans are the important source which resulted in repossessions of assets by the
companies. In year 2008 there was 10 % in crease in the repossession of autos by the companies (Melody, 2008).
1.8
Secured Loans
A secured loan is a kind of loan in which asset is kept as pledge by the borrower as a security for the loan (Debby, 2008). This asset can be property, car, or any other asset. Secured loans are characterized by low rates of interests than unsecured loans because they are backed by securities. Rates of interests are also affected by other factors like credit history, market conditions, expected returns and ability to repay the loan. Secured car loans are those loans which are backed by some securities. The assets which are kept as security can have more or less value than that or car. This security allows creditor to repossess the car in case of any default from borrower side. Secured car loans allow customers to purchase the car even if they have less income. Secured car loans allow customers to borrow large amounts of loans equal to the value of security. The assets kept as security allow borrower to set terms of repayment. Secured loans are more flexible as compared to other kinds of loans. Borrowers who have less income can get secured loans easily by keeping assets as collateral. In case of secured car loans, lenders do not hassle to repossess the car in payment is delayed or any other issue occurs. 1.9 Unsecured Car Loans
An unsecured car loan is a kid of loan in which is not backed by any kind of security (Debby, 2008). The lender gives car loan on the basis of credit history of borrower. In case of unsecured loans different kinds of issues arise such as bad credit, non payment of installments by the borrower. In these loans lender takes the risk and imposes some hard rules on the borrower. This is the reason such loans are not easy to get. Borrowers have to be credit worthy person in order to get unsecured loans. Lender investigates the credit history of borrower and then grants unsecured loans in order to avoid any kind of defaults. These loans carry higher interest rates because they are not backed by any security. It brings financial load on the borrower. If any delay in the payments occurs, lenders can ask for repossession of asset because they have concern about their
investments. So it is important for borrowers to pay installments on time. Some of the benefits of secured loans are given as below: • • • • Secured loans do not require any kind of security. These loans are beneficial for students or other persons who do not have any assets to be kept as security. Process to get unsecured loan is easy as compared to other traditional kinds of loans. Credit history is analyzed and loan is granted to the customers in short time. Unsecured loans can be extended by increasing installments and keeping the interest rates low. In case of poor credit history, unsecured loans are difficult to get. It can be easy to get secured loans if borrower makes reasonable down payment to the lender. 1.10 Research Questions
Research questions are designed to narrow down the topic of research. The foundation of whole research is based on research questions so it is important to design accurate research questions. Research questions designed for this particular research are as follows: • • • • • What is auto finance and what are different modes of auto financing? What are the factors that influence customers to take a particular type of auto loan? What are benefits of different auto loans? How do interest rates affect decisions of borrowers to take auto loans? What kinds of risks are exposed to the market as a result of vigorous auto financing schemes? What steps government can take regarding auto finance industry?
Chapter Three Research Methodology
3.1
Introduction
Developing a theory, explaining a phenomenon, or extending an existing theory all are the examples of research. Social research is a type of research which involves explanation of behaviors of societies (Pan, 2011). Research requires specific situations and paradigms. Each research is conducted by a specified research methodology. Different kinds of research methodologies produce different results. It is very important to interlink research methodology and research aims and objectives (Hatch and Cunliffe, 2006). This chapter presents details and justification of research methodology. Research philosophy, approach, data collection techniques and research ethics are discussed in this chapter of research. 3.2 Research Philosophy
Research philosophy creates background of the research and determines conditions in which research is being conducted. Blaikie (2000) says that research philosophy must be interlinked with the research aims and objectives. There are fur main kinds of research philosophies. These are realism, positivism, Interpretive or Social Conservatism and pragmatic philosophy of research. Realism philosophy of research deals with the explanation of existing theories and models. Pragmatic research philosophy decides about the solution of problems. The positivism philosophy of research decides about the social values. Interpretive or Social Conservatism deals with the social behaviors. This particular research is being conducted by adopting positivism philosophy of research. Positivism philosophy deals with the explanation of existing theories and models. The affect of auto financing on the consumers and perceptions of consumers about auto financing can be best explained through positivism philosophy of research. The aims and objectives of research can be properly defined with the help of positivism philosophy of research. The realism philosophy deals
with the experimentations which is not objectives of this research. Interpretive or Social Conservatism and pragmatic philosophies do not match with the aims and objectives of research so they are avoided. 3.3 Research Approaches
There are two types of research approaches. One is called inductive approach and the other one is deductive approach of research. Deductive approach of research deals a phenomenon from general to the specific point of view. Inductive research approach deals from specific to a general point of view. Deductive research approach explores existing theories and models and reaches at a specific point of view whereas inductive research approach constructs theories on the basis of observations (Saunders et al., 2009). This particular research is being conducted by incorporating both approaches of research. Deductive research approach deals with the construction of literature review of research whereas inductive research approach fids the impact of auto loans on the economy and investigates perceptions of customers about auto loan products. These both approaches are important for the complete explanation of research aims and objectives. 3.4 Research Method
There are two methods of research. These are qualitative and quantitative research methods. Qualitative research methods deal with the explanation of behaviors and perceptions of individuals of society. Qualitative research methods explain research problem in the form of words. On the other hand quantitative research methods explain research phenomenon in numeric form. Quantitative research methods involve statistical operations on data (Saunders et al., 2009). There is another research method which is called triangulation research method or mixed method. Triangulation research methodology is combination of qualitative and quantitative research methods (Denzin, 1970). This type of research methodology is beneficial as compared to the single methods because it compares secondary and primary data. This particular research is conducted by triangulation research methodology. Literature review of research is constructed with the help of qualitative research methodology. Existing research work regarding auto financing is investigated with the help of qualitative research methods. Quantitative research methods are used to analyze
the findings of survey. The use of triangulation methodology establishes strong base of research. Primary data is compared with the secondary data and relation is developed. 3.5 Data Collection Techniques
Two types of data are used in the research. These are primary and secondary data. Primary data is the first hand data. It is collected for the first time and does not exist in the literature. Secondary data already exists in the literature in books, articles and journals. Primary data is the first hand data so chances of biasness in this data are less as compared to the secondary data which is processed form of data. Primary data is also called fresh data. There are various kinds of tools fro the collection of primary data. Primary data can be collected through questionnaire survey, interviews, and focus group discussions or through observations. In observation technique researcher observes attitudes and behaviors of a particular group. This technique of data collection is very narrow and does not produce accurate results. Questionnaire survey technique is used to find the characteristics of a large population in short time. Survey is flexible and cost saving tool of primary data collection. Interaction of researcher is very low during the survey so chances of biasness in the results are very low. During interviews researcher directly asks questions from the respondents. This technique data collection is used at places where researcher has to ask some detailed queries. Interaction of researcher with the respondents is high so the results produced can be biased. Interviews require higher cost and proper arrangement to be conducted. The results of interviews are of high quality as compared t that of surveys which can produce vague responses. A focus group consists of six to twelve persons. A trained mediator is appointed in order to ask questions from the participants of focus group. Participants are asked to present their point of view regarding the subject of discussion. They are asked to describe whatever comes in their minds. In this way it can be said that focus group discussions are natural discussions. It can happen that focus group discussions produce biased results because of interaction of mediator with the respondents. Focus group dissuasions are costly and require proper arrangement. On the basis of pros and cons of all data collection techniques, researcher has adopted questionnaire survey technique for this particular research. A questionnaire is developed to conduct survey. Focus group discussions and interview techniques are not adopted for this particular
research because they are costly for the research. Observation technique does not match with the aims and objectives of the research so it is not adopted for this particular research. 3.6 Population and Sample
All the individuals who are targeted in a particular research are called its population. In this particular research population comprises of all the individuals who are customers of auto makers in United Kingdom, UAE and Pakistan. It is not possible for the researcher to collect data from all customers of automakers in these countries. For this purpose researcher has selected a representative part of population which is called sample. Sample provides convenience saves time during data collection. The researcher has selected a sample of 100 customers of automakers from UAE, UK, and Pakistan. 40 customers have been selected from UK, 30 from UAE and 30 from Pakistan. There are two types of sampling techniques. These are probability and non probability sampling techniques. Probability sampling technique enables each member of population to be selected in sample whereas non probability sampling technique does not give equal chance to all members of population to be selected as a member of sample. Researcher has adopted convenience sampling technique which is basically a form of non probability sampling technique. In convenience sampling technique researcher collects data from individuals who are easily assessable. Probability sampling technique is not used because it is very complex.
Analysis of Data: Introduction
4.1
Introduction
Primary data for the research is collected through a survey. 100 % response rate has been achieved in the survey. This chapter percents the data and analyses it critically. Results of each section of questionnaire will be discussed in detail and compared to the literature review. 4.2 Findings of Questionnaire
Mode of Auto Purchase: Respondents were asked to identify the mode of auto purchase. They were given two options. One was cash and the other one was auto financing. Respondents were directed to fill the rest of questionnaire if they selected auto financing as mode of auto purchasing. The results show that 38 % respondents purchase auto through cash whereas a large proportion of respondents selected auto financing which is objective of this research. The respondents who purchase cars on cash said that they prefer cash purchase of cars because it charges less cost to them. Some of the respondents said that they prefer cash purchasing of Auto because financing takes more time and it is not flexile tool of financing. The respondents who purchase cars through auto loans prefer this mode because it is convenient for them. Some of the respondents have shown that they prefer auto financing because they cannot afford cash cars. Graphical representation of the results is a follows:
Demographics of Respondents:
To evaluate the demographics of the sample researcher has asked about the gender, age, education, profession, income and accommodation of respondents. Gender: The results of the demographics show that there were 54 % males and 46 % females in the sample. It can be deducted that males have more interest in cars as compared to females. Other deduction made from the frequency distribution of sample in terms of age is that males prefer to take part in survey as compared to females. The graphical presentation of frequency distribution of gender of respondents is as follows: Age: The results of the frequency distribution of age of respondents show that 5% respondents were of less than 25 years old. 17% respondents belonged to 25 – 35 years age class. There were 40 % respondents who were between 36 – 45 years of age. 27 % respondents were between 45 – 55 years of age. There were 11 % respondents who were above 55 years of age. The results suggest that most of the respondents who take interest in car purchasing belong to middle age category i.e. 36 – 45 years. Individuals of this age category are in their mid careers so they can afford purchasing cars. Individuals who are less than 25 years of age have just started their careers so they cannot afford luxuries in this age. On the other hand individuals who are older in age prefer to save money rather then spending on luxuries so they are also less in proportion in the sample. The graphical presentation of frequency distribution of age of respondents is as follows: Education: Results about the education of respondents show that 7 % respondents had education of high school diploma. There were 19 % respondents who have completed undergraduate program. 34 % respondents have completed graduate program. There were 29 % respondents who have completed Masters Degree. 11 % respondents have received Doctorate Degree. The graphical presentation of frequency distribution of education of respondents is as follows:
Profession: Respondents were asked to mention their profession. The results show that there were 30 % businessmen and 70 % salaried persons in the sample. Most of the salaried persons take auto loans whereas businessmen prefer to purchase cars on cash basis. The graphical presentation of frequency distribution of profession of respondents is as follows: Income: Results about the income level of respondents how that there were 8 % respondents who had income of less than £5000. 17 % respondents were in income range of 5001 to 20000 £. There were 40 % respondents who were in 20001 – 400000 income range. 26 % respondents belonged to 400001 – 60000 income class. 9 % respondents belonged to 60001 – 90000 income class. None of the respondents had income level of more than £ 90000. The deductions made from the frequency distribution of sample in terms of income is that most of he respondents who have middle income category take interest in purchasing cars through loans. The graphical presentation of frequency distribution of income of respondents is as follows Accommodation: The results about the accommodation of respondents show that there were 34 % respondents who have their own accommodation. 46 % respondents live in rented accommodation. There were 23 % respondents who reside in other than their own and rented accommodation. These respondents either lived in company’s owned house or share the accommodation with their friends or colleagues. The graphical presentation of frequency distribution of accommodation of respondents is as follows Prefer Mode of Auto Financing: Respondents were given two choices for choosing mode of auto finance. The choices were: Auto loan and auto lease. The results of this question show that 57% respondents prefer auto loans whereas 43 % respondents prefer auto lease. The respondents who chose auto lease said they get tax benefits in their business by this mode of auto finance. Respondents prefer auto loan because it is less expensive as compared to auto lease. Kevin (2008) suggests that auto lease works better when individuals want to replace the car every 2 to 3 years. He further suggests that individuals
who want to have long term benefit should purse auto loan. The results of the question are graphically represented as follows: New, Current or Previous User of Auto Financing: Respondents were asked to sows the duration of using auto financing. They were given three suggestions. These were new, current, and previous. The results of survey show that there were 19 % respondents who were new users of auto finance. 39 % respondents were current and 42 % respondents were previous users of auto finance. It can be deduced that in the past auto finance was at boom so most of the respondents acquired auto finance at that time. In current time auto finance is not as much as it was in the past, so new users of auto finance are less. The results of the question are graphically represented as follows: Interested in Financing New Car or Used Car? Respondents were asked that whether they have interest in financing new car or used car. The results of the survey show that 45 % of the respondents have interest in financing new car whereas 55 % respondents have interest in financing used car. Financing a new car involves higher cost whereas financing a used car involves less cost. This is the reason most of the respondents prefer financing used car. In financing an old car expenses like deprecation, insurance, maintenance, and taxes are less. If a person finances a new car then all the above expenses will be higher for the same mileage (Kiplinger, 1990). This is the reason most of the respondents prefer to finance a used car. The results of the question are graphically represented as follows: You consider your auto financing decision? Respondents were asked to identify that how do they decide for the auto financing. 39 % respondents said that first they plan and then decide about auto financing. There were 12 % respondents whose decisions about auto finance were of impulsive nature. 19 % respondents said it was hard to resist auto financing so they decided to adopt it. 20 % respondents had best option for purchasing auto in the form of auto financing. 10 % respondents have market others option. In others option, most of the respondents specified that their relative or friends have recommended them to choose auto financing. Auto financing affects cash flows of individuals for a number of
years so it is very important for customers to take rationale decision about auto financing. The results of the question are graphically represented as follows: Do you consider your Auto financing decision? Respondents were asked to identify the worth of their decision about auto financing. 57 % respondents consider their decision as beneficial. 43 % respondents consider their decision as non beneficial. It is very important to mention that respondents who plan for the auto financing decision consider their decision as beneficial whereas respondents who take decision either impulsively consider their decisions as non beneficial. It can be deduced that planning is very important for taking decision about auto financing. The results of the question are graphically represented as follows: Any other mode of financing, you are availing? Respondents were asked to mention that whether they are availing any other mode of financing or not. 76 % respondents said that they do not avail any other mode of finance. 24 % respondents avail other modes of financing rather than auto loan and auto lease. Most of the respondents said that they have purchased car on credit in the past. The results of the question are graphically represented as follows: Have you ever been defaulted? An optional question was asked that whether the respondents have ever been defaulted or not. The results of the survey show that 33 % respondents said that they have been defaulted in the past. 67 % respondents said that they have never been defaulted for auto financing. The respondents who had taken decision about auto finance impulsively said that they have been defaulted. On the other hand respondents who take decision after proper planning have not been defaulted for auto financing. The results of the question are graphically represented as follows:
Customer Preferences In the questionnaire some questions about customer preferences were asked. Respondents were asked to identify their preference about secured or unsecured lending. 52 % respondents said that they prefer secured lending because it involves lower rate of interest. O the other hand 48 % respondents said that they prefer unsecured lending because they do not have any asset which can be kept as collateral. In case of secured loans lender is secured for the amount kept as security whereas in case of unsecured loans lender does not take any security from borrower. Unsecured loans present risks for the borrower so to compensate that risk they charge higher rate of interest. Borrower selects secured or unsecured loan depending upon his or her financial strength. The results of the question are graphically represented as follows: Your opt Auto financing to… Respondents were asked to mention that why do they opt auto financing. 45 % respondents said that they opt auto financing to buy their first vehicle. 27 % respondents opt auto financing to buy their second vehicle. There were 17 % respondents who said that they opt auto financing to change or upgrade vehicle. 11 % respondents identified other reasons for opting auto finance other than above mentioned reasons. The results of the question are graphically represented as follows: You prefer Auto financing product which offers… Respondents were asked to identify their preferences for the products of auto finance. 39 % respondents said that they prefer those auto finance products which offer them value. This value represents value of money. 24 % respondents said that they prefer those auto finance products which offer them less hassle. There were 11 % respondents who said that they prefer those auto finance products which offer them product quality. 15 % respondents favored customization. 9 % respondents said that they prefer those auto finance products which provide them value added services. 2 % respondents preferred some other reasons for preferring auto finance products. The results of the question are graphically represented as follows: Please rate your overall perception towards use of Auto financing in relation to auto industry & economy
Respondents were asked to identify their overall perception about auto financing in relation to industry and economy. 46 % respondents said that auto financing is beneficial for the whole economy whereas 54 % respondents said that auto financing is non beneficial for the economy. The results of the question are graphically represented as follows:
Chapter Five Conclusion
5.1
Introduction
Data collected through survey technique has been analyzed in the previous chapter. In this chapter all the findings of the research will be given conclusion shape. All the findings of the research are related to the secondary data which is presented in the literature review. On the basis of results recommendations are proposed. Limitations of the study are also listed in this chapter of research. 5.2 Conclusion
The results of the survey show that most of the respondents who were salaried persons adopt auto financings. Respondents who had average salaries prefer to adopt auto financing rather than purchasing auto. Prefer mode of auto finance is auto loan as compared to auto lease. Auto loan is less expensive mode of auto financing as compared to auto lease (Kevin, 2008). Most of the respondents were previous users of the auto financing. New users of auto financing were less because auto financing has been reduced. Financing of a used is cheaper as compare to that of a new car so most of the respondents preferred financing old car (Kiplinger, 1990). Auto financing impacts cash flows of individuals for 2 to 3 years after acquiring the auto finance. It is important for the individuals to take decision about the auto financing after proper planning. It has been found in the results of survey that most of the respondents plan before taking decision about the auto financing. These respondents take rationale view of the situation and decide for appropriate mode of auto financing. Auto financing is proved beneficial to these respondents whereas it has been proved non beneficial to the respondents who do not plan for auto financing. The respondents who
plan before taking decision have not ever been defaulted whereas respondents who do not plan and decide impulsively about auto financing have been found defaulted. Most of the respondents have said that they prefer secure lending as compared to insecure lending. Secure lending is characterized by low interest rates so respondents preferred it. On the other hand respondents having low income prefer unsecured loan. It has been found that salaried persons prefer auto loan as compared to auto lease. Auto loans are less costly whereas auto lease is expensive mode of auto financing. Businessmen prefer auto lease because it offers them tax shield Kevin (2008). Auto financing is beneficial for the individuals who cannot afford to buy a new car. It allows persons having less income to have their own car. It has been found from the results that auto lease is best for the individuals who tend to replace their cars every 3 to 4 years. 5.3 Limitations
5.4
Recommendations
•
References: Frank K. Reilly, Keith C. Brown, (2002). Instrument analysis and portfolio Management
• • • • • •
G. L. Evans. (2008). Secrets of Auto Financing: Non-Prime Auto Financing and What You Should Know Before You Buy Michael R. Czinkota, Ilkka A. Ronkainen. (2007). International Marketing Frank J. Fabozzi, CFA, Vinod Kothari, 2008. Introduction to Securitization, John Wiley & Sons Stuart I. Greenbaum, Anjan V. Thakor, (2007). Contemporary financial intermediation. 2nd edition Vinod Kothari, (2007). Securitization: the financial instrument of the future, Volume 385 of Wiley finance series Mollaghasemi, Mansooreh, Pet-Edwards, Julia, and Gupta, Uma.(1995) engineering management, 42: 278-285 “A multiple criteria buy versus lease analysis for government contracts”, IEEE transactions on
• • • • • •
Melody Hoffman, (2008). Car repossessions highest in a decade Gerard McCormack (2004). Secured credit under English and American law. Cambridge University Press. pp. 16 Debby Fowles, (2008). Everything Personal Finance in Your 20s and 30s: Erase Your Debt, Personalize Your Budget, and Plan Now to Secure Your Future Kobliner, B. (2009). Get a Financial Life: Personal Finance in Your Twenties and Thirties. oxford: Simon and Schuster. Kevin Chappell, (2008), Auto Financing: Leasing versus Buying. Ebony, Vol. 63, No. Kiplinger's Personal Finance, 1990. Vol. 44, No. 10
Questionnaire Auto Financing
May we Know About You?
Name Address (optional) E-mail Phone (optional)
May we add you to our mailing list, which offers news and exciting products, promotions and surveys regarding services improvement?
□ Yes
□ No
1.
Your Preferred Mode of Auto Purchase?
Specify reason_________________
(Please Tick One)
□
Cash
B.
□
Auto Financing Specify reason _________________________
(If you selected option A, Please Answer only Section 3 below of the questionnaire)
2. Your Preferred Mode of Auto Financing? )
A. □ Auto Loan B. □ Auto Lease Specify main reason for preference _____________________________?
3.
Key Demographics:
A. Gender: B. Age:
□ Male □ Female □ <25 □ 25-35 □ 36-45 □ 45-55 □ >55 □ High school Diploma □ Undergraduate □ Graduate □ Masters □ Doctorate
C. Education:
D. Profession
E. Income Bracket (Monthly in £ )
□ Businessmen □ Salaried Person □ Other □ <5000 □ 5001 - 20,000 □ 20,001 - 40,000 □ 40,001 - 60,000 □ 60,001 - 90,000 □ >90,000 □ Owned □ Rented □ Other_________________
F. Accommodation:
4. Product Usage:
A. New, Current or Previous User of Auto Financing? B. Interested in Financing New Car or Used Car? C. You consider your auto financing decision? Chose Only One
□ New □ Current □ Previous □ New □ Used □ Planned □ Impulsive □ To hard to resist □ Best option available □ Other Specify? _____________________ __________________________________ □ Beneficial □ Not Beneficial Specify Reason_____________________________
D. Do you consider your Auto financing decision
E. Any other mode of financing you are availing?
□ Yes Please Specify ___________________________________ ___________________________________ □ No □ Yes Please Specify Reason? ____________________________ □No
F. Have you ever been defaulted? (optional)
5. Customer Preferences:
A. You Prefer…
□ Secured Lending (Low Markup) □ Unsecured Lending (High Markup) □ Buy your first Vehicle (Necessity) □ Buy Second Vehicle (for family usage) □ To change/upgrade Vehicle model (Luxury) □ Other Reason? _______________________ □ Value (Low Markup) □ Low Hassle (Fast Processing) □ Product Variety (More Vehicle Options) □ Customization (tenure, flexibility in repayment options etc.) □ Value added services (Insurance, trakker service etc.) □ Other, Specify? ________________________ ________________________________________ ________________________________________
B. Your opt Auto financing to…
C. You prefer Auto financing product which offers… (Choose most Preferred)
D. Would you like to suggest any room for improvement /options in your existing auto financing product?
6. Customer Perception:
Please rate your overall perception towards use of Auto financing in relation to auto industry & economy
□ Beneficial □ Not Beneficial Specify Reason______________________ __________________________________
Thank you for your Participation!
