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Finance analysis: Dealers face early settlement costs

Retailers are likely to bear the brunt of significant additional costs from consumers settling finance agreements early.

Under new consumer credit legislation, which came into play in May, dealers could have to absorb between £120 and £160 per finance agreement in additional costs from early settlements, which account for the vast majority of deals.

Finance companies, which claim they will have to pass on the bulk of the additional burden to retailers, are likely to opt for one of two unpalatable options.

These involve either matching commission paid to the period of an agreement, or putting up the base rates they charge the trade.

The former would have cash flow implications for retailers, while the latter would also impact on their bottom line.

The Consumer Credit Early Settlement Regulations meant finance providers had to switch from the traditional “rule of ’78” to actuarial methodology. In parallel the number of months’ interest that can be incorporated into the calculation has been cut from three to two.

For agreements with terms below 12 months it comes down to just one month.

Finance company executives are keen to work with retailers to protect a highly competitive sector, but they acknowledge that changes are inevitable.

Peter Cottle, deputy managing director of Capital Bank Motor, says that while the industry is “absolutely committed” to the spirit and letter of the regulations there is a cost involved and it is one that cannot be wholly borne by suppliers.

“The reality is that the industry must find a commercially viable way forward and this will need to happen sooner rather than later,” he says.

Brendan Devine, managing director of GE Capital Woodchester, welcomes the greater transparency for consumers, but adds: “These come at a cost.”

Extending the term before debit back policies kick in could be a more acceptable solution by matching the true agreement lifetime to the commission paid. Debit back involves finance companies claiming back commission if an agreement does not last its full term.

Mark Standish, Carlyle Finance managing director, claims there are alternatives to re-scheduling commissions and changing base rates. He says dealers must understand “the need for change which incorporates consumers’ needs and promotes POS finance as the natural source of financing”.

Carmakers’ captive finance providers often apply shorter agreement terms and are therefore less likely to settle as early as the independent sector.

One analyst says: “Everyone in the sector, bar the consumers who are benefiting, will take a hit at some time. That could be up to £200 per early settlement. A lot of the industry is in denial, or avoiding being the first to jump or be pushed.

“Once that happens everyone will follow suit and the retailers will pick up most of the tab.”

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