New Car Finance Rules Could Save You £275 a Year
17th August 2020
Shocking as it may seem, it turns out that the brokers and dealers setting you up with your next motor might not always have your best interests at heart. Some of them are actually out to line their own pockets on the side.
Okay, sarcasm and fake surprise aside, there’s actually a nasty little wrinkle in the finance deal system that was seeing many of us losing out around £275 a year on our car agreements. Basically, the people selling you those deals were better off the worse your finance deal was for you. Landing you with a more expensive plan landed them a higher commission.
Seeing what was happening, the Financial Conduct Authority (FCA) has jumped in to ban these types of deals, which could be good news for UK car buyers.
When do the new rules kick in?
The new rules kick in on the 28th of January 2021, so you’ll still have to be on your toes if you’re looking for car finance in the meantime.
To put it in real terms, the old “Reducing Difference in Charges” system could see you paying well over a grand more on a typical £10,000 4- year plan, which is about 50% more in interest costs. Banning these kinds of agreements, according to the FCA, is set to save UK buyers a whopping £165 million overall, or £275 per year apiece. Switching to a flat fee system essentially kills off the dealer’s incentive to rope you into a rough deal.
The good news doesn’t even stop there. The FCA’s got some real muscle in matters like this, and it’s flexing hard. The ban on abusive commission deals won’t just apply to car finance. In fact, every kind of finance agreement will have to start playing fairer from the 28th of January next year.
With so many people struggling to cope with the financial fallout of COVID-19, this is an important development at a critical time. It’s worth being a bit cautious, though. Brokers don’t like losing money any more than the rest of us do. We don’t yet know how they’re going to react to the end of the old commission rules they were used to, but there’s a good chance they’ll try to claw the cash back some other way.
Buyers could well find car or option bundle prices rising, for instance. Alternatively (or even additionally), the flat commission rates offered to dealers could go up. As always, you’ve got to go into any kind of finance deal with your eyes open. As Sarah Nield, financial services risk and regulation director for professional services network PwC, puts it:
"Given the largest commissions received by brokers tend to come via the models set to be banned, it will be interesting to see how lenders, brokers and dealerships react. Although we expect firms to comply with the spirit of the changes, it could result in unintended consequences including increased flat fee commission payments, car prices and bundled product costs."