Car salesmen looking to increase their commission are fuelling increased vehicle purchases from the forecourt by using cheap loans to get a sale.
New and used car sales have risen substantially over the last few years and this has been attributed to the low-cost finance deals which are used to entice the customer to buy the car, with some using finance deals such as 0% interest loans.
Figures indicate that approximately 75% of the new cars bought (699,052) in the 12 months to the end of March 2013 had a finance deal attached with repayment plans sold by dealerships, according to the Finance Leasing Association. This compares to figures produced in 2010 where repayment plans were sold with just under 50% of new car sales.
It is not just the new car market which is seeing this dramatic increase in low cost finance deals, as the used car market has seen sales with extremely low loan rates increase by 7% during the same period.
The cheap interest-free deals are encouraging buyers to purchase either a new or used car with some fixed rate loans offered at an incredibly low 2.9%. Many salesmen are now reaping the financial rewards through their commission schemes as a result of the increasing sales, though there are concerns that this approach may be causing the buyer to make the wrong choice.
A survey by Auto Express has found that it can now be cheaper to purchase a new car using a finance deal than buying a used car in a similar fashion.
Steve Fowler of Auto Express says, “Car dealers don’t just sell cars these days. They’ll try just as hard, and use just as many tricks, to get you to take a finance package, too, and in some cases they’ll earn more commission from the finance than they will on the car.”
When making a car purchase the best loan deal would depend on the size of the deposit, Credit Score and the type of finance deal opted for, but choosing the forecourt finance would normally mean extra commission for the car salesmen on top of the sale commission. There are fears that the lure of this extra commission can mean the salesmen do not explain the drawbacks or small print details of using the dealership finance.
Customers are usually easily tempted by the low monthly repayments on offer and do not read the terms of any penalty fees and what would happen if they could not afford to pay the loan back.
The different types of car finance options ranging from hire-purchase agreements to leasing mean it is difficult for customers to compare the costs of the loan agreements and thus make an informed decision of the cheapest and most affordable deal for them.
In fact, according to the Financial Ombudsman complaints relating to hire-purchase agreements have increased by 10% this year.
Una Farrell of debt charity StepChange says, “People should be very careful when buying a car on dealership finance, and look at the penalties. They need to be prepared to be able to repay the debt if they get into difficulty, and must know what will happen if they get into difficulty.”
The car manufacturers have been quick to point out that it is up to individual dealerships to reward staff commission and have said that dealerships are informed to sell finance in a clear manner to ensure the customer is fully informed of the finance deal they may be signing up to.
Ben Ryland is a Credit Analyst at checkmyfile. He has a degree in International Business and Management from Aston University. He can be contacted at ben.ryland@checkmyfile.com