Alternative Auto Financing Puts Car Ownership in Reach in Emerging Markets

For millions of people in emerging markets like South Africa where public transport is slow, unreliable, and sometimes dysfunctional, owning a vehicle is far more a necessity than it is a luxury.

But when it comes to vehicle financing, most individuals, albeit with well-paying jobs, are locked out of the traditional lending landscape due to outdated criteria used by the dominant incumbent banks operating in the space.

Eerik Oja, co-founder and CEO of Estonia-South Africa rent-to-own car subscription service Planet42, described the “unfair” situation using this example: Take a teacher who earns a steady monthly salary of $1,500 and can afford a car loan, but has been blacklisted by banks for missing a monthly payment on their satellite TV subscription four years ago.

That lending strategy is one they at Planet42 find completely absurd, he said.

To make matters worse, banks have increasingly adopted that conservative lending approach since the onset of the pandemic, resulting in banks rejecting up to 90% of vehicle finance applications submitted today, Oja added: “There are millions of people who three years ago would have been able to get bank loans to [buy] a car but can’t anymore.”

It’s that widening mobility gap that mobility startup Planet42 is looking to bridge, using a tech-driven approach and alternative data sets to make fairer, faster, and more affordable credit decisions. The result of that is a greater number of customers, who would have been ignored by banks, getting access to vehicle financing for the first time, he said.

Last December, the startup raised $30 million in funding, and its socially inclusive model has led to the purchase of more than 10,000 cars for customers in the past two years, an indication there is huge demand for the service moving forward.

“As of right now, the main value proposition for [our] customers is that without us they will not have a car. That’s very simple,” Oja said.

Flexibility Guaranteed

Like other startups that are looking to shake up the used vehicle financing market, Planet42 has had to build relationships with dealerships, an aspect of their business which has been key to their growth and development.

Their model is pretty simple. Customers choose a car they like from a second-hand car dealership and Planet42 buys that car and rents it out to the customer on a subscription basis, fully inclusive of rental, comprehensive insurance, and GPS tracking.

Oja pointed to the flexibility their model provides, unlike traditional financing schemes that have longer, more stringent contract terms that can go up to several years. “[Our] subscription contract is flexible, meaning that after the first six months the customer can return the car to us anytime if they want to or they can also buy out the car.”

Read more: Online Car Marketplaces Drive Profits for MENA Startups

From the dealer’s perspective, Oja said that working with Planet42 isn’t so different from working with a bank. If anything, it is preferable as the company is often able to process applications and make payments on the same day.

And for some of the dealerships they work with, the startup is now funding more monthly car purchases “than all the banks combined.”

What Next for Vehicle Financing?

Launching in South Africa in 2017, Planet42 has since expanded into Mexico, and Oja said the company has plans for further international expansion going forward with a medium-term goal of purchasing one million cars across its initial markets.

The firm is also keeping open the possibility of a more diverse business model in the future, extending its service from mainly financing used cars to include new vehicles.

And although they don’t finance cars for gig economy workers such as ride-hailing drivers or motorcycles for delivery drivers, it’s a small but rapidly growing segment that they might consider once scale and funding costs are addressed.

In the meantime, they will be focusing “on this huge unaddressed market of everyday people needing cars to get to work and back,” he noted.

Finally, there is the prospect of growing Planet42’s presence in the automotive eCommerce space. On this point, Oja echoes Tarek Kabrit, co-founder and CEO of Dubai-based online auto marketplace Seez, who told PYMNTS in a recent interview that the market for online car sales presents a huge opportunity considering that globally, only 2% of car sales take place online.

Related: Automotive Retail Needs to Think More Like Uber and Open Table to Sell Cars Online

Echoing Kabrit, Oja said that “it’s clear that the direction is up” for online car sales, adding that growth, however, is likely to be gradual initially as it will require cultural change.

That said, when the automotive eCommerce sector does kick up, he said “we’ll be sure to contribute our little bit to that as well.”

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