What’s the difference between a regulated and unregulated (or non-regulated) car finance agreement? Why does it make any difference to you?
If you don’t know you definitely need to read on – understanding the difference could potentially save you thousands of pounds and ensure you are ‘clued up’ when financing your next supercar.
The Law, and the bit that affects you – The Consumer Credit Act.
Consumer credit in the UK is regulated by the Consumer Credit Act 1974 (CCA) and the later Consumer Credit (EU Directive) regulation 2010.
Quite simply, the CCA is designed to protect consumers when they borrow money and regulate how credit is advertised and sold. For car finance, it covers the following important areas.
The information borrowers are provided with before they enter a credit agreement
How APR’s (Annual Percentage Rates) are calculated
How credit is advertised and sold
The content of credit agreements
What happens if you terminate the agreement, default or settle early.
Who and what is covered by the Consumer Credit Act
Consumers – defined as individuals rather than businesses (but can be sole traders or in a partnership).
Who and what isn’t covered
The regulations may not apply under the following circumstances:
Business Exemption – If you are entering into the agreement predominately for the purposes of business, the Consumer Credit Act regulation doesn’t apply.
High Net Worth Exemption – where the creditor/hirer is a person of “high net worth” the regulations under the Act do not apply. “High net worth” Individuals are defined as persons whose income after tax and national insurance is not less than £150,000 per year or as persons who have net assets of no less than £500,000 excluding their primary residence, any redundancy payments or any pension or other retirement benefit payments. This is only for loans above £60,260, and better still you don’t have to opt out if you don’t want.
Other than that even if you are a High Net Worth (like many of our clients) you can still get the protection of the Consumer Credit Act.
Ending the agreement.
Many car owners wish to end their finance agreements early, whether that be to part-exchange for another car or pay the agreement off in full.
Under an agreement regulated by the Consumer Credit Act, you are entitled to terminate the agreement early and receive a statutory rebate of interest charges and normally a penalty fee equal to around 58 days interest charge.
With an unregulated agreement, you have no right to terminate the agreement early or to receive a rebate of interest charges although some lenders may rebate a small sum, or typically agree to a higher penalty for you to terminate.
The way settlement figures are calculated is prescribed in the CCA and uses a standard formula called the Actuarial method.
Under the CCA, each repayment you make is made up of both capital and interest repayments – the interest element of the payment will be largest at the beginning of the agreement.
With non-regulated agreements, as you have no right to end the agreement early the lender may require you to pay all outstanding interest and capital repayments, so you could pay more than you borrowed.
A regulated agreement gives you the right to terminate an agreement early if you have paid half or more of the Total Amount Payable. You simply return the car to the lender, and the agreement ends leaving you with nothing more to pay. The car must, of course, be in reasonable condition for its age and mileage.
There is no right to early termination under an unregulated agreement. The full risk is yours for the duration.
Key financial information
With a regulated agreement, all the information that you need is presented in a standard format which includes a complete breakdown of all charges and interest rates. Due to standards for treating customers fairly most of this information is also on a non-regulated document but can be a little harder to understand.
With so many benefits to taking out a finance agreement that is regulated by the CCA, why would anyone choose one that wasn’t?
Loans of over £60,260
The Consumer Credit (EU Directive) regulation 2010 specified that loans of over £60,260 were not covered by all consumer credit regulation, so for many lenders loans of more than that amount will automatically be unregulated. Some lenders do, however, offer the security of a regulated agreement for far larger amounts (more on that later).
If you are entering into the agreement predominately for the purposes of business, Consumer Credit Act regulation does not apply anyway.
Some business users or high net worth individuals want more flexible finance arrangements than those covered by the Consumer Credit Act – for example, balanced payments schemes, variable rate, interest only agreements or structured repayment plans.
Many regulated agreements need to be signed on trade premises – taking an unregulated agreement can sometimes give borrowers the speed and flexibility they require.
For those with complex financial situations, non-regulated agreements can sometimes offer the flexibility and security to the lender that is required to get a deal done
Settling early – unregulated agreements
Unregulated agreements (Fixed Rate) have no provision for early settlement. If you want to get out of the agreement, you will have to pay all the outstanding payments, although some lenders will give a very small % reduction. In other words, you can end the agreement early, but it will cost you. For this reason, very few people settle an unregulated Fixed Rate agreement early – and we don’t like to sell them. The other option is the Variable Rate Facility – this does give early repayment options but these penalties are considered high versus the regulated position as traditionally they equate to a percentage of the capital balance remaining.
For a number of reasons, some lenders will not offer consumers a regulated agreement. Under these circumstances, they will typically require the consumer to sign a declaration to say that they are using the vehicle principally for business use so they can lend outside the CCA regulation. If you aren’t, and you are a private individual rather than a business, you should consider very carefully why they have asked you to do so.