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Bank Of England Shakes Up Car-Loan Market

Good news for car buyers has come from the Bank of England, which has opened up the car-loan market by granting licenses to additional providers. The first of these new providers is Paragon, a Midlands-based company that has thus far specialised in buy-to-let mortgages. The company has around £9 billion in its buy-to-let mortgage book and has now been licensed to use savers’ deposits to make loans available to car buyers.

Good news for car buyers has come from the Bank of England, which has opened up the car-loan market by granting licenses to additional providers. The first of these new providers is Paragon, a Midlands-based company that has thus far specialised in buy-to-let mortgages. The company has around £9 billion in its buy-to-let mortgage book and has now been licensed to use savers’ deposits to make loans available to car buyers. Up to 23 other companies are thought to be weighing up a move into the market.

The government has been keen for some time to introduce more competition into the banking market, which has been dominated for some time in the UK by the Big Four of the Royal Bank of Scotland, Lloyds Banking Group, HSBC and Barclays. Instead of competing on the high street, however, Paragon will not open branches, operate cash machines or offer current accounts. Instead, it will focus on providing the finance for car loans. Moving forward, it may introduce other consumer finance products and also move into small-business loans. Paragon’s chief executive, Nigel Terrington, has said that he sees the company as a specialist lender. It is expected that the move will create around 150 new jobs.

Richard Doe, who was formerly in charge of ING Direct UK, has been brought in to manage the new bank. Paragon will not launch any savings products until May, however. The company also says that its business model does not include trying to capture what it calls ‘hot’ savings customers, who regularly move funds between banks to take advantage of the best offers and special introductory rates. Paragon’s progress towards becoming a bank began on July last year, when the company approached the Prudential Regulation Authority to apply for a banking licence. This is the Bank of England’s regulation body. The government has made it easier to become a bank and Paragon needed to show funds to cover one year’s capital and trading expenses. This amounted to around £13 million. This is substantially lower than under the previous rules, which would have required funding for five years.

Further competition in the market is good news for consumers, who will now have even greater choice when it comes to finding car loan providers. The added competition from firms with low cost bases may also help to keep interest rates low.

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