Car buyers are being warned to beware the potential pitfalls of unregulated car finance that is leaving many facing hidden exit fees costing thousands of pounds.
Unregulated car finance falls outside the Consumer Credit Act 1974 (CCA) leaving those who want to end their car finance agreements early, part-exchange or pay off the agreement in full typically facing large penalties.
While unregulated agreements still offer options to end the finance contract early, they typically do so with a large penalty charge that can be equal to the full interest outstanding or in some instances a levy of up to five per cent charge against the remaining balance.
CCA regulated agreements are for consumers and are ideally suited to those wanting to change their cars regularly or end finance agreements early. They receive a statutory rebate of interest charges and normally an exit fee equal to around just 58 days interest charge.
The worse recent example Magnitude Finance has heard of is someone being charged an early settlement fee of £8,550. This was for ending an unregulated agreement on a Lamborghini Huracan Performante costing £220,000. It included a five per cent charge on the outstanding balance of £171,000 and the customer having to pay a proportion of the monthly interest.
This level of penalty can easily wipe out any equity clients believe they have in their vehicles.
Compliance Director at Magnitude Finance, Mark Lloyd, said: “A growing number of people are coming to us for help saying their car finance provider did not tell them about exit fees and didn’t even offer the choice of regulated finance.
“This fails to meet treating customers fairly guidelines set out by the Financial Conduct Authority. Customers should be given the choice of regulated and unregulated finance agreements with both options clearly explained at the outset. This is not happening with many clients being shoehorned into unregulated finance deals that are not fit for purpose.”
“Those selling these products do so because they are very lucrative due to high interest charges being front-loaded at the start of the agreement and expensive exit fees. The more expensive the car, the harder hit people are.”
As most luxury car buyers change their cars regularly, Magnitude Finance says an unregulated finance agreement with high exit fees calculated against the outstanding balance, which is usually a large amount, is clearly unsuitable. It advises those financing expensive cars in particular to be aware of this and consider regulated and unregulated options before signing any contract.
Magnitude Finance also warns people to look out for being asked to sign a business use disclaimer when they are not a business user as this is how many finance companies are flouting the regulations. Unregulated agreements were created for those using cars for business or high net worth individuals (HNWI) and have exemptions that apply to qualify for such.
HNWI are defined as people whose net income i.e. after tax and national insurance is more than £150,000-a-year or who have net assets of more than £500,000 excluding their primary residence, redundancy payments or retirement benefits such as pensions.
“If sold in the right circumstances – such as to those who keep their cars over the full period of the finance term allowing them to benefit from cheaper borrowing – then unregulated finance can be suitable,” adds Mr Lloyd. “However it’s those lenders that only offer unregulated products where the key problem exists. “There is a role for unregulated agreements but people need to be able to make informed decisions. “The key is being clear on your plans for the car and choosing the most appropriate option.”
This is one of the key reasons we like to understand a clients full requirements from the start and ensure they have the most suitable product from our panel of lenders.