The Party's Over For Greedy Dealers - The Shady World Of Car Finance

Added: 2026-05-22

[00:00:03]Hello and welcome back to the channel.

[00:00:04]In today's video, I'm going to be discussing how car finance was like the wicked wild west when I joined the industry in 2018 and how legislation was brought in in 2024 to protect the customer and stop the unscrupulous dealers trying to land people in a bad situation negative equity wise in order to get more finance commission.

[00:00:27]The other car dealers are not going to like me for this one.

[00:00:30]So car finance was introduced in Ireland in late 60s, early 70s and it was really revolutionized in around 2014 when PCP was brought into the country. And the reason being why this was so effective was because car prices at that stage brand new had started to increase pretty dramatically and we're seeing big figures relatively speaking for a brand new car. So in order to make the monthly repayments affordable for people, PCP was brought in. And the difference between PCP and higher purchase was the dealer could set the GMFE, which is also known as the guaranteed minimum future value and also known as a balloon payment.

[00:01:18]And they could raise the balloon payment in order to get the monthly repayments brought down.

[00:01:23]Works like this.

[00:01:26]This made the repayments for the first 3 years pretty affordable and it was great to get people in the door.

[00:01:33]And it changed people from buying a car to buying a monthly repayment.

[00:01:38]When I first went for the first interview in the motor trade, a big topic of conversation was PCP.

[00:01:46]And I had a quick look online the night before and tried to wrap my head around it, but I couldn't.

[00:01:52]Now, I'm not the most intelligent fellow in the world and I'm not great at understanding new things that are not familiar with and I don't have an interest in. And at the time, I had no interest in PCP. It's a bit of a buzzword.

[00:02:05]And they asked me if I understood how it worked, if I knew what a guaranteed minimum future value was, and I gave some answers, and eventually I said, "Look, lads, I actually don't know. I had a quick look on your website last night. I'm really willing to learn though."

[00:02:19]And it was that honesty that actually got me the job.

[00:02:23]Um but it just goes to show, back in 2018, there was a major major push on PCP. Nowadays, not so much. So, higher purchase versus PCP, what is the difference? Higher purchase is basically a straight loan. So, the price of the car is 20 grand, you'll get your few grand interest added on, you pay it off over three, four, five years, sometimes six now on a newer car, and the loan is paid. There's nothing to worry about, that's the end of the story.

[00:02:54]PCP is a little bit more complicated.

[00:02:57]So, just say the price of the car is 20 grand, you're putting your few grand deposit in, and you have a monthly repayment.

[00:03:08]And at the end of the three years, you have then what's called a GMFV, guaranteed minimum future value balloon payment.

[00:03:17]And at the end of the three years, you have a decision to make.

[00:03:21]You can either pay off that GMFE, and you then own the car, you can refinance the GMFE, often at a higher rate than what was originally given to you for the loan, or you can hand back the keys, give the car back, and not worry about the GMFE. That leaves you with no car, no equity, and it's not a good thing to do, generally speaking.

[00:03:44]Now, generally speaking, PCP can only be done on a car that's three years old or newer. A higher purchase can be done on a car up to about 10 or 11 years old.

[00:03:56]The older the car gets, the less lenders that you have available to loan the car.

[00:04:00]So, the competition is smaller for that business, and often rates can go up a little bit the older car gets.

[00:04:08]And the reason that is is because the older the asset is that the bank is financing, the riskier it is. So, with a brand new car, because PCP involves a guaranteed minimum future value, which means if the driver of that car doesn't do any major wear and tear to it and stays under the guidelines for the mileage, the bank, the finance house, the garage, they are obliged to stand over that minimum future value. So, at the end of the term, if you want to hand back the keys, and they've offered you a GMFV of 15 grand, if there's no major wear and tear on it, they have to give you 15 grand for that car, no matter what. Um so, a newer car is less likely to have internal damage in the engine.

[00:04:56]It's just a less riskier asset because it's newer and has a shorter lifespan.

[00:05:01]After the 3 years, it's seen a bit of road, it's got more wear and tear naturally enough, and it becomes a riskier asset.

[00:05:10]This is also the reason why PCP generally has lower interest rates compared to higher purchase.

[00:05:17]Because it's all risk to valuation. If they're financing riskier assets, they're going to want more bang for their buck in case they do have to repossess that car and sell it on off at an auction. So, to be able to understand how dealers were screwing people with the interest rates, you need to understand who was making what off of the loan.

[00:05:40]So, banks lending money for car finance, they don't just have pools of cash on reserve, and they're able to physically give it for a particular car. They get their money from a variety of places including the central bank, deposits, and bonds, all types of stuff. And that money comes at a cost to them.

[00:06:04]Back when I started selling cars in 2018, interest rates were crazy low. And the reason they were so low was after the crash, they needed low interest rates to stimulate the economy.

[00:06:17]And that stayed in place for about 10 years. Since COVID, we saw an increase in rates.

[00:06:25]So, these rates are not applicable anymore. They're going to be a higher.

[00:06:28]But this is a rough idea of what it would have been like when I first started. So, the cost of a 30,000 euro loan to the bank was about 2% annually.

[00:06:38]So, the garage was getting that 30 grand loan, 5% was the base rate. So, what that means is the the bank was making a 3% spread on what they were getting the funds for compared to what they were getting the the garage was getting the 30 grand for.

[00:06:59]So, it was then at the discretion of the garage how much they wanted to charge the consumer. So, the 30 grand, their money was starting at 5%. They could give a customer 5% APR and make zero commission.

[00:07:17]This happened on very rare occasions, maybe if a family member was buying a car or something along those lines.

[00:07:25]The garage was able to physically set how much APR. So, they could range, I've seen it go from 5% up to 15%.

[00:07:33]And naturally, the more percent that they were charging the customer, the more money the bank was making, and the more they were able to give the customer.

[00:07:45]So, someone who was an accountant, we'll say, who clearly knew their stuff about finances, they would probably be getting a 7 or 8% APR.

[00:07:57]If they were really in the know, they'd be able to bite back a bit and get it reduced down to the 5% and they'd be able to get a really good deal for themselves. Someone who doesn't understand all this terminology, who doesn't understand anything about rates, who isn't savvy with their finances, they were walking in blind and they were at the mercy of the dealer and they would often get charged the higher end of the spectrum, the 13, 14, 15%.

[00:08:24]And they were paying back thousands more interest over the course of the 5 years on a 30 grand loan.

[00:08:30]And if they wanted to trade in after 2 years, they would have had a lot more owed on their car, often more than what their car was worth and they were left in negative equity. So, when I first started in car sales, this was how PCP was used to give people a lower payment to get them into a car and to leave them again in negative equity.

[00:08:55]So, you have two examples. This is probably a correct example, a proper way to do it.

[00:09:01]And the car they're financing is 30 grand.

[00:09:05]They might have a 5 grand deposit in. 30 grand is the finance amount. So, the loan that they'd be paying over 3 years is 17 grand.

[00:09:15]The guaranteed minimum future value, also known as the balloon payment at the end of the 3 years was 13 grand and the monthly repayments at around a 6, 7% APR is 517 euros.

[00:09:31]Now, if you're buying a car for 35 grand and you're financing 30 of it, you'd think after 3 years if you stuck to the 10,000 km a year mileage that very conservative it would be worth at least 13 grand and you'd probably be in a good position at the end of the 3 years to trade up cuz you might have 4 grand 5 grand equity going into the next deal.

[00:09:55]And you're back to similar situation, back to similar repayments on a similar price car. Happy days.

[00:10:02]But if a customer is coming in and they're looking at the 35 30 grand car and they can't actually afford 517 a month, they need lower repayments.

[00:10:14]Dealers used to be able to edit the guaranteed minimum future value. This is where it got dangerous.

[00:10:20]So they would instead make the loan smaller and the GMFE higher and you're financing a lesser amount over 3 years. They're now financing 12 instead of the 17.

[00:10:34]Your GMFE however at the end of the 3 years is 18 grand.

[00:10:40]Now 13 grand was conservative. You knew you were going to be in a good position at the end of the 3 years.

[00:10:47]Sometimes what was happening at the end of the 3 years, that 35 grand car was not worth 18 grand and what would happen would dealers would not be in a position to buy that car back for the 18 grand because it wasn't worth it. So they'd have to pick faults in the car, devalue it and make out that the car was at fault, really scrutinize the mileage etc. Cuz what was happening was customers were negative equity. Their car might only be worth 15 16 17 or even if it was worth the 18.

[00:11:22]If they wanted to trade up, they no longer have equity going into the next deal. So they're starting off from zero and they have to put more cash in to get back down to the low monthly repayments and a lot more cash at that. So, GMFV goes up, monthly repayments come down, which is great for the 3 years that you're financing, but like everything, the chickens will come home to roost at some stage and you will be faced with this dilemma of a high GMFV, your negative equity, and it's not a good conversation and it's not a good situation to be in.

[00:11:57]Oftentimes, what was happening was people were forced to refinance this 18 grand at a higher interest rate, paying more interest on top of what they've already paid and sometimes financing over 3 or 4 years. So, that 3-year loan that you thought you were going to get away with a nice 6% APR, it was turning into a five, six grand, uh five or six-year loan, and it wasn't just at a 6% APR.

[00:12:27]This was getting financed, which is the bulk of the finance, was getting financed at like a 10, 12, sometimes 13, 14% APR. Not a good system.

[00:12:38]So, around 2021, finance institutions started realizing what was going on, that the dealers were pushing up the GMFV in order to get lower repayments, and it was leaving people in negative equity. There were some awkward conversations being had with people wanting to hand back the car, and it was becoming a bit of a problem for the financial institutions. So, they started being more strict on dealers' control over this, and they started automatically creating a low conservative GMFV uh when a customer was proposed with the bank.

[00:13:13]Uh I don't think personally it was out of the goodness of their hearts. I think it was to protect themselves and stop them having more money outstanding on an asset that wasn't worth it.

[00:13:25]In regards to the higher purchase, this started around 2024. It kind of followed on from the UK.

[00:13:33]Um, there was a really big party for dealers. In a lot of cases, that they were making more money out of the finance commission than they were the actual profit in the car.

[00:13:43]This is down to their control, their them being able to bump up the interest rates. So, in 2024, this became heavily regulated. It was all standardized, and there was no favoritism anymore. Every customer gets the same rate. The kickbacks are gone way down. The commission is really poor compared to what it used to be. Now, we do still get commissions from the banks, very, very small.

[00:14:07]It's not something we're focused on.

[00:14:09]It's not something we're worried about.

[00:14:11]Um, so, it's not really in our interest to push finance on customers as much as it was before. It's great. You get a small few bob for it, but it's not a money maker for us anymore, really. And this really affected some of the large car supermarkets.

[00:14:27]Their business model was based on sell the car cheap, make the money on the interest rate, and make the money on upselling products. So, products like paint protection and gap insurance and stuff like that. And that is still their business model. They still do well out of that stuff, but they took a big hit when this regulation was com- came in or when it was brought in about the finance.

[00:14:49]So, although the party is over for the dodgy dealers and the big commissions are no more, all of this regulation is actually a good thing for the market.

[00:14:58]For customers and for dealers, cuz I remember there was plenty times over the years when a customer would come in to me who I hadn't dealt with before, who would have been put on a high APR loan unnecessarily by a previous dealer, they were in too much negative equity, and needed too much deposit to change, and the deal wouldn't be done. And that was was short-sightedness by dealers, because if that customer was to go back to them, the same thing would have happened. They'd be in too much negative equity and they wouldn't get a second deal out of that customer. And so it's not long-term thinking.

[00:15:32]In general, lending regulations and how strict the banks are on who they give money to has tightened up massively over the last few years.

[00:15:41]In 2018, I remember a customer came in to me to buy an Audi.

[00:15:46]He was a student making 250 euros a week and he wasn't really a good applicant and I did not think he'd be approved.

[00:15:54]But however, he wanted the car, I sent in his proposal to the bank and he got automatically approved.

[00:16:00]Took like 15 seconds. Signed on the dotted line and away he went.

[00:16:04]Um so over the last few years and as we see rates going up and up, we notice that lending has gotten a lot tighter.

[00:16:13]So dealers will only give an expensive car to someone who's got a good deposit, who's a good applicant, who's earning enough income. And that is all a good thing for the market.