Discretionary commission arrangement is a way for car dealerships or finance brokers to earn a commission from the finance company for arranging your car loan.
The catch is in the word “discretionary.” This means that the dealer or broker has the freedom to set the interest rate higher than the base rate provided by the finance company. The higher the interest rate, the more commission they stand to earn.
While this might seem like a normal practice in the finance world, it can lead to some concerns. You may end up paying more for your car finance than you need to, simply because the dealer or broker is taking a bigger slice of the commission pie.
How does a DCA affect your car finance?
When it comes to car finance with a discretionary commission arrangement, your interest rate can vary, even if your credit score and financial situation are identical to someone else’s.
💡 For example: You could visit two different dealerships and get quoted two different rates for the same car. This difference comes down to the dealer’s discretion in setting the interest rate, not your financial profile.
The potential issue here is transparency. Unless you ask, you may not even realise that the rate you’re paying is higher than it could be. This can make it harder to compare car finance offers, as you might not know if the interest rate reflects the true cost of borrowing or if it’s been inflated for commission purposes.
The role of regulation
Thankfully, there’s been a growing focus on making car finance more transparent.
The Financial Conduct Authority (FCA), which oversees the regulation of financial services in the UK, has been particularly active in this area.
The FCA’s goal is to ensure that consumers are treated fairly and that the financial market operates with integrity. This includes looking closely at how car dealerships and brokers earn their commission from car finance agreements.
🚗 Learn more: What Type Of FCA Authorisation Do Car Finance Providers Require?
What changed in 2021?
In 2021, the FCA took significant steps to tackle the issues surrounding discretionary commission arrangements. One of the key changes was the ban on commission models that were seen to be encouraging brokers and dealers to charge higher interest rates just to earn more commission.
Previously, this type of commission was known as Difference in Charges (DiC). Under this model, the dealer or broker could increase the customer’s interest rate above a base rate provided by the lender, and the more they increased it, the bigger their commission would be.
This clearly created a conflict of interest, as it encouraged the dealer to prioritise their earnings over the best financial deal for the customer.
The FCA recognised that this practice was leading to customers paying unnecessarily high costs for car finance, often without realising it. The DiC model allowed dealers to hike up interest rates without being fully transparent about how the rates were determined.
Present day
Now, the FCA has banned these types of commission structures, ensuring that brokers and dealers cannot directly benefit from increasing the customer’s interest rate. However, while this move has been a positive step forward, not all commission structures have been eradicated.
Discretionary commission arrangements still exist, albeit in a more controlled form. Dealers and brokers may still have some flexibility in setting interest rates, but they must now clearly disclose any fees or commissions involved in the car finance process.
🚗 You might like this guide: Have you been mis-sold car finance?
How to protect yourself when financing a car
When you’re looking at car finance deals, it’s important to do your homework. Here are a few tips to help you avoid paying more than necessary under a discretionary commission arrangement:
- Compare Rates: Don’t settle for the first offer you get. Compare rates from different lenders or brokers to ensure you’re getting a fair deal.
- Ask Questions: Make sure to ask whether the interest rate you’re being offered includes any commission for the dealer or broker. While they’re not always obliged to disclose the exact figures, you can get a sense of whether commission is impacting the rate.
- Check the APR: The Annual Percentage Rate (APR) gives you a fuller picture of the cost of borrowing, including any fees or commissions. Focus on this number when comparing finance offers.
- Consider Independent Lenders: You don’t have to finance your car through the dealership. Banks, credit unions, and online lenders might offer better rates with less room for discretionary commission.
Why transparency matters in car finance
The whole point of transparency in car finance is to make sure you, the customer, are getting a fair deal. With discretionary commission arrangements, there’s a risk that you could end up paying more for the same loan than someone else, simply because the dealership or broker wants a bigger commission.
This is why it’s so important to ask the right questions and stay informed about how your car finance deal is structured.
Dealers and brokers are businesses, and commission is a normal part of the process. However, understanding how it works and what options are available to you can help you avoid unnecessary costs. It’s about making sure you get the best deal possible without any hidden surprises.
Final notes
A discretionary commission arrangement in car finance might sound complicated, but it boils down to this: dealerships and brokers have the ability to adjust your interest rate to increase their commission.
By being aware of this and knowing what questions to ask, you can protect yourself from overpaying and ensure you’re getting the best possible deal on your car finance. So next time you’re in the market for a new car, be savvy, ask the right questions, and always compare your options.
