New rules for car dealer finance

The way in which car dealers sell finance changed on the 28th January 2021, making the process fairer and more transparent for car buyers.

What has changed?

The FCA (Financial Conduct Authority) has banned the use of discretionary commission models by car dealers and motor finance brokers.

What is a discretionary commission model?

In the words of the FCA – “Currently, some car retailers and motor finance brokers receive commission which is linked to the interest rate that customers pay – creating an incentive to sell more expensive credit to some customers.

The broker can effectively set the interest rate and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests.”

In other words, a car dealer or finance broker may have received more commission for selling an agreement at a higher finance rate – the rate and who they sold it to was up to them. So, two identical customers – Customer A & Customer B – could walk into a showroom and buy the same model of car at exactly the same time and be charged a completely different interest rate. Customer A receives an offer of 7.9% APR and Customer B 11.9% APR – meaning that Customer B pays more in charges and the dealer receives more commission in return. Obviously, Magnitude would have offered a lower rate in both instances!

After an investigation, the FCA published a policy statement paper in October 2019 and has since banned the use of these commission models as they found them to be unfair & against the interests of car buyers.

What happens now?

Dealers and brokers will now operate on a fixed APR or fixed commission basis. This means that the process is more transparent and dealers will not be tempted or incentivised to overcharge customers. Commission hasn’t been banned though, and under the new rules finance commission and how it affects the amount payable by the customer must be disclosed, and the amount must be confirmed if the customer asks.

What does this mean for car buyers?

Effectively, it means that car dealers and brokers will have to offer car buyers their best rate upfront, so no more haggling or negotiation. This should certainly reduce finance charges for some buyers, provided dealers have decided to reduce their rates – although this is not a prerequisite and some dealers will stick with what they have got. If the buyer doesn’t want to accept a dealer’s offer, they simply need to arrange a better finance package elsewhere. The classic scenario of dealers offering a high finance rate and then eventually cutting it to win the business can no longer happen.

Rate-for-risk models are also being used by some dealers, where the dealer predetermines the amount or percentage of commission they wish to earn and then offers the best rate to the customer that allows them to earn the desired amount.

There is, however, scepticism in the industry as to how well some rate-for-risk schemes will actually work.

What does this mean for Magnitude Finance customers?

We’ve always been upfront with our customers and offered them a very competitive finance rate, and we remain supremely confident that we will be able to “beat the dealer”. You can simply use our finance calculator to configure your finance at the rate you can expect to get and apply online.

So, if you haven’t used us before the decision to use Magnitude Finance should now be even more simple and straightforward.

Unlike many brokers, we work on small margins and large volumes of business which is why we are able to negotiate the very best finance rates from our lenders and keep our customers for life.