The truth about consumer finance

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By Jonathan Evetts, Business Development Manager, Phoenix Financial Consultants:

In the UK we love to upgrade our homes, whether that be a new kitchen, bathroom or conservatory. But we don’t all have large deposits sitting in the bank, therefore we often look to the retailer of that kitchen, conservatory or bathroom for finance options.

It’s much easier to ask the retailer than search around on or other such platforms.

Large retailers have been offering finance to customers for years but how can small to medium sized kitchen and bathroom retailers break into this market?

How does this type of finance work and who are the major players?

How do you navigate the regulatory regime?

This article sets out to demystify the market for the small to medium sized retailer.

1. How does the finance work?

The scope of home improvement finance is generally between £500 and £50,000. It covers supply only and supply plus installation transactions.
For very large jobs, customers will generally approach their mortgage lender to see if they can increase their mortgage amount. Of course, mortgages are secured on the customer’s home and that can put some people off.

A loan obtained through a home improvement retailer is known as Point of Sale (POS) finance or Retail Finance. It is an unsecured personal loan which means that if the customer defaults the lender cannot repossess any of his assets.

Customers never actually receive the money from these loans. They are paid directly to the retailer within a few days of satisfactory delivery or installation of the job. This is what makes offering these loans very attractive to retailers – as well as generating more leads and better conversion there is minimal risk of bad debts or late payments from customers on financed transactions.

Also, lenders often do not always require deposits from customers so in theory they may be able to finance the entire job.

POS finance also includes Section 75 protection from the customer – part of the Consumer Credit Act 1974. This means that the customer can get redress from the lender in the event of a poor quality product or installation.

Customers only ever need to rely on this if the retailer is unwilling or unable to correct whatever went wrong with the job.

2. What interest rates are offered?

For unsecured personal loans where the money is paid to the customer, an interest rate or APR is offered to the customer based on his risk profile.
However, with Point of Sale finance the retailer decides what Representative APR to offer. This makes it easier to advertise and easier for the customer to understand what interest rate he or she is likely to get.

Some retailers offer 0% APR and others select interest bearing rates, i.e. 9.9% APR, 14.9% APR etc. 0% and other very low APRs incur a cost – known as a subsidy – which the lender deducts from the job price.

To avoid losing margin 0% retailers sometimes mark up their average price across the board by a few percentage points. This is difficult to do if margins are tight but each retailer has to make their own commercial assessment.

Lenders can provide 0% options from 6 months up to 5 years. The longer the term the bigger the subsidy.

Retailers who don’t want to increase their average prices can select a subsidy free product, i.e. 11.9% APR. Most lenders will provide loans up to 10 years in length. Some will go up to 15 years for very big kitchen or bathroom jobs.

3. How does a retailer access the market?

There are three lenders that dominate the Point of Sale finance market for home improvements:

• Barclays Partner Finance;
• Creation (part of the BNP Paribas Group).
• Hitachi Capital;

In addition, there are another seven lenders who are well-known in this space:

• Allium Money;
• Duologi;
• Ikano Bank;
• Klarna;
• Omni Capital;
• Shawbrook Bank
• V12 Retail Finance;

Lenders will usually deal direct with very large retailers. Small to medium sized retailers (less than £3m in revenue) will generally need to go via a broker.

There are a host of brokers and IT platforms out there but all of them will need a lender to provide the finance for the customer’s purchase.

4. Isn’t consumer finance regulated though?

If the retailer is offering only 0% finance repaid in 12 or fewer instalments there is no need to be authorised. To offer any other product the retailer needs to be authorised by the Financial Conduct Authority (FCA) as a credit broker.

The authorisation process generally takes 3-4 months.

However, there is a way for a retailer to introduce their customers to finance through another credit broker without being authorised. In this scenario the retailer can be appointed as an Introducer of the broker. This can be a quicker and less expensive way of putting finance options in front of customers.

The retailer is not allowed to actively ‘sell’ finance as an Introducer but they can – by using the broker’s system – present finance options to customers at the point of sale.

5. A word of warning for retailers

Given that small and medium sized retailers will need to partner with a broker, selecting the right broker is key. The broker’s IT system and customer journey are also important to investigate before signing up.

Also beware of large upfront and/or monthly management fees. We are aware of several brokers who try to charge retailers anything from £1,000 to £3,000 in order to register them as Introducers.

In some cases these brokers aren’t even offering genuine Point of Sale finance, instead they offer another version of or

Other brokers charge monthly management fees. These can easily be avoided by selecting the right broker.

If you need any help in deciding whether you would like to offer Point of Sale finance or would like to explore your options, including getting FCA authorised, feel free to reach out.

We are FCA authorised credit brokers specialising in the home improvement space and work with a panel of lenders.

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