This advice and the guidance also on the MSE site that notes; “Unless you can get 0% finance from the dealer, personal loan rates tend to be cheaper than dealer finance” crystallises the challenge facing used car finance. In an increasingly online personal finance world, informed and empowered customers are in control and trusted guidance is steering them away from dealer finance. It’s time for a 180o turn; meeting the Financial Conduct Authority (FCA) January 28th deadline for change is the opportunity.
MotoNovo Finance’s Chief Risk Officer Stephan Bothma is urging dealers to prioritorise their approach to the forthcoming changes and make a positive decision, noting; “As a risk professional, I recognise the risks of change, but above this, I recognise the risk of not embracing change positively. The dealer model is not immune to the current High Street issues. If we don’t take care of our customers, someone else will. Dealers need to invest in their relevance to today’s car buyers. Perceptions of used car dealer finance need to change. It is worth noting that finance volumes from over 2,000 dealers embracing MotoRate have grown over 70% new business year on year.”
Pricing Model Options & Customer Outcomes
The FCA’s Policy Statement on motor finance referenced the ban of discretionary models and two potential pricing options; risk-based pricing and flat-fee models. To these, the market is now also starting to see some signs of a fixed rate and fixed commission model. Fixed-rate finance is easy and compliant in principle, but it risks falling short of changing the dynamic for car buyers.
Ensuring, ‘that consumers get a fair deal’ is top of the FCA’s objectives in demanding change in dealer finance. Stephan has a clear view of what this means; “A fair deal could be seen as subjective, but when aligned to the FCA’s call to; ‘reduce financing costs for consumers’, I think we all have a clear idea of the regulator’s intent. For me, it means offering a fair interest rate, appropriate to the applicant’s circumstances. Risk-based pricing delivers this and is behind most unsecured personal loan models.
“Fixed-rate finance is a blunt one-size-fits-all pricing model that does not work for the most creditworthy and can impact the broader loan book portfolio quality negatively, which, is bad for the reputation of dealer finance. It creates the self-fulfilling prophecy highlighted by MSE; Rates are often higher than standard car loans. As a result, all too often, customers seek their finance elsewhere, especially those with a better credit profile. It feels like an own-goal.”
The experience of over two thousand car dealers is that a risk-based pricing model that invests in the customer’s experience with a personalised approach that creates the fair deal sought by the regulator is elegantly effective. Dealers are growing their used car finance sales and they report it is helping their reputation. Stephan concludes; “The prize of positive change in finance is evident already; it is helping to turn the tide in the way people finance their used cars and helping to make the dealer model relevant and valued. Some may see the move as brave, I see it as crucial to the sector’s future.”