Car Finance Commission Changes | Car Finance Broker UK

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How is Car Finance Commission Calculated?

From Thursday 28th January, things will be slightly different if you’re taking out a motor finance agreement for a car purchase. Long story short, as a customer, the motor dealer or finance intermediary arranging your car finance will no longer have undue influence over the rate of interest charged (the APR). They will also have to make it clear if they are receiving any remuneration (commission) from the lender for arranging the finance on your behalf. The Finance Conduct Authority (FCA) wants to make sure that consumers are receiving a fair deal and these changes are likely to save British consumers an estimated £165 million in excess commission changes.

There’s a lot of industry guidance and regulatory information about the subject, but it’s not the most interesting read…so Fast Car Finance has pulled together everything you need to know about the forthcoming changes. These changes will affect all lenders, motor dealers and finance brokers who arrange new or used car finance.

Why Has The FCA Announced Changes To Car Finance Commission?

The FCA’s mission is to ensure that markets are transparent and fair and they aim to “increase competition and protect consumers.” In the same way as you might take out a mortgage or loan, the lender or broker will have to make it clear they are receiving a finance commission for the deal they are arranging for you as consumer. You are now entitled to ask them to let you know the commission they will receive and they are legally obliged to tell you.

How Were Car Finance Interest Rates Calculated in The Past?

In the past, lenders, dealers and finance brokers were able to structure car finance at a higher rate of interest (APR) because they had the discretionary ability to do so. Whilst a specialist motor finance broker such as Fast Car Finance will always try and secure the best interest rate available for a client, for many consumers arranging car finance that was sadly not the case. Ultimately the discretionary commission models often meant the consumer was being charged more for their car finance than they should have been (which is how the FCA has reached the £165 million of savings in commission changes).

For example, if you walk into a car dealership, they might ask you “What is your monthly finance budget for your new car?” If that figure was £500, they might work out the structure of your car finance and the subsequent APR from that figure. So that could mean that the APR is perhaps a little higher than it could have been as the car finance loan has been packaged to come within your budget. In turn the broker or motor dealer arranging your car finance might earn more finance commission if they offer you a deal at 10% APR compared to another car finance deal with 8% APR.

However, if the product with the 8% APR earned them less commission, there was no regulatory obligation placed upon them to offer you the lower rate deal – so you would be paying more for your car finance each month unnecessarily.

From 28th January, discretionary commission will end and lenders will offer motor dealers and brokers a new pricing matrix which will prevent them from affecting the level of commission they earn.

What Impact Will Credit Rating Play on Car Finance?

In the past, if your credit rating was poor, you would almost always pay a higher rate of interest on a car finance deal because you were perceived as having a higher risk of default or late payment. This is unlikely to change but Fast Car Finance thinks one of two things is likely to happen under the new regulations.

Lenders could offer a “one size fits all” interest rate. For example, a lender may decide to have one interest rate across the board for a certain type of motor finance product. As an example, this might be based around the amount you borrow, the age of the car and the term of the loan. With these new changes, a customer with an average credit rating could be offered a car finance deal with the same APR as somebody with a good credit rating.

Lenders may determine the APR a customer pays once they have undertaken their own credit assessment (i.e. once the broker or motor dealer has submitted your finance application for underwriting). Fast Car Finance has already seen evidence that this is happening with our lenders. We think motor finance lenders are likely to offer a range of APRs on their car finance loans and that these interest rates will be determined by a number of factors including credit rating and their own internal affordability assessment on your application. Affordability assessments typically include your bank statements and proof of income (payslips, P60, tax return etc).

What Will Change When I Buy a Car From Now on?

Whoever you secure car finance through, whether it’s a dealership or a specialist, independent car finance broker such as Fast Car Finance, you will expect to see the commission structure clearly laid out within the Regulated Credit Agreement and Understanding Your Agreements document.

These changes will apply to any regulated credit or consumer hire agreements. From 28th January 2021, make sure you see this before you sign anything!

TIP – If you are arranging car finance in your personal name then in almost all cases the agreement should be “regulated.” A regulated car finance agreement protects you under the term of the Consumer Credit Act 1974 (CCA). Some motor dealers and car finance brokers offer “unregulated” car finance agreements but these waive your consumer rights under the CCA. Typically, unregulated agreements are only suitable for high-net-worth individuals or those using a car predominantly for business use. Fast Car Finance is happy to advise on the suitability of both regulated and unregulated car finance.

What is Fast Car Finance’s Approach?

As an independent, car finance broker, we have access to an extensive panel of lenders in the market. We work with both mainstream and specialist lenders and will always suggest a car finance product suitable to your circumstances. From your first contact with us, we will carry out a fact find to ascertain if we have a finance option that will be suitable for your classic, prestige, sports or supercar needs.

Many Fast Car Finance clients come to us rather than rely on car dealerships as we are experts in securing car finance for a wide range of specialist cars. Motor dealers are often tied to a primary lender (perhaps a manufacturer scheme) or may have a volume bonus incentive in place. As a niche car financer broker, we have spent many years developing relationships with a wide range of lenders.

If you want to talk to us about your current car finance deal then we can talk about how we can save you some money. If you drop us a line with your finance agreement and up to date settlement figure we can talk you through the options.

You can find us at 01635 785 400 or contact us via the website.

We’d always advise you to shop around for car finance quotes – Steve and Andy tell you why in this short video!


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