Earlier this year, new regulations about how finance is sold came into force. With the majority of cars sold at a dealership bought with some form of finance, car buyers need to be aware of what’s changed and what the new law means for them when opting for an agreement supplied by, or through, the dealer.

Whether you’ve used dealer finance before or not, this article highlights recent changes to the law that aim to make dealer finance more customer-friendly.

First off, the new regulations from the Financial Conduct Authority (FCA), which came into effect on 28 January, give car buyers more control over their finance journey. It’s also worth keeping in mind that ‘dealer finance’ rarely means the dealer is actually lending its own money. More typically the dealer offers finance from a host of well-known banks or specialist in vehicle finance. These lenders are also governed by the same new strict rules.

autos, cars, car news, finance, insurance, car finance: latest rules explained

How popular is dealer finance?

More than 93% of private new car buyers opted to use dealer finance last year, according to data published recently by the Finance & Leasing Association. While the percentage of people using dealer finance for a used car is not as high, uptake is expected to increase following the introduction of new FCA rules for dealer finance.

The new regulations were brought in to “break the strong link between customer interest rates and broker earnings to decrease financing costs for consumers”, according to the FCA. So what’s changed?

autos, cars, car news, finance, insurance, car finance: latest rules explained

Discretionary commission banned

Until 28 January, dealers could adjust finance prices to increase their commission; this has now been banned. The new FCA rules mean dealers can no longer negotiate on finance interests rates. To quote the FCA: “Preventing the use of this type of commission removes the financial incentive for brokers [dealers] to increase the interest rate that a customer pays and gives lenders more control over the prices customers pay for their motor finance.”

autos, cars, car news, finance, insurance, car finance: latest rules explained

Commission disclosure changes

The second change now in place is the requirement for dealers to ensure consumers receive timely, relevant information about the existence and nature of finance commission that they may still earn.

While this does not mean dealers need to tell customers upfront about the commission, it does mean that consumers must be made aware that commission may be earned. Customers can ask the amount of commission being earned before signing an agreement, and the dealership must provide the exact or expected commission amount. Dealers also need to make it clear what effect their commission has on the amount payable by the customer.

autos, cars, car news, finance, insurance, car finance: latest rules explained

Two types of dealer finance

The interest rate consumers should see offered by a dealer will either be a fixed interest rate or one that is based on the customer’s risk rating (which is why your credit score is so important). Which option being offered is likely to vary from dealer to dealer.

In risk-based pricing, the rate offered to the customer is tailored by the lender, not the dealer, to the applicant’s credit score. This means that the better your credit score is, the better your car finance rate could be.

Speaking to YesAuto about the new regulations, Mark Standish, boss of MotoNovo one of the UK’s leading car finance specialists, said: “Commonly used in unsecured personal loans, risk-based pricing matches the interest rate offer to each customer’s credit status. Whereas the traditional finance model provided a broad-brush pricing that was very often unattractive to the most creditworthy.”

The new FCA rules are part of a broader shift that places the customer in greater control of car finance through a dealer when there is a growing move to online quotes and finance applications.

However, as Standish concludes, access to competitively priced finance is not the only reason people are turning to dealer finance increasingly: “The growing availability of risk-based pricing and commission transparency means more car buyers are now enjoying very competitive interest rates” when buying from a new or used car dealer.

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