Motorists overcharged by £1,000 by dealers for loans to buy cars, warns financial watchdog
The financial watchdog warns that 560,000 customers could be paying a combined £300million more in interest – or 50 per cent more than they need to.
Its mystery shopping research found that on a typical motor finance agreement of £10,000, higher broker commission left customers paying around £1,100 more in interest over the four-year term.
The regulator adds that it has seen "widespread use" of brokers setting high customer interest rates in a bid to earn higher commission.
This in turn can also see higher risk customers priced out of the market and credit given to borrowers who can't really afford to make the repayments.
Jonathan Davidson, executive director of supervision – retail and authorisations – at the Financial Conduct Authority (FCA) describes the practice as "unacceptable".
Don't be caught out by these car finance contract terms
Here’s a checklist of points you should look out for in car finance small print:
- Mileage limit: In most contracts where you don’t own the car outright there will be a mileage limit – often 10,000 but lower on smaller models. If you’re doing a lot of commuting it’s easy to breach these and end of contract excess charges are steep.
- Interest rate: Shop around for the best deal and find the APR and total cost of borrowing that suits you. Beware of signing up to monthly payments that stretch your budget. A bigger deposit will reduce monthly outgoings and interest is less, too.
- Wear and tear: If you’re handing the car back it’ll need to be in good condition. Make sure you know what counts as reasonable wear and tear before you’re hit with a repair bill after the contract ends.
- GAP insurance: This will pay out if the car is written-off in an accident while there’s still finance to be paid on it. But it can be expensive and cover can be limited.
- Balloon payment: If you opt for PCP you won’t own the car until you pay the settlement figure. Make sure you know what this is and that you can stump up the cash if you do want to keep the vehicle.
He said: "We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves."
"This is unacceptable and we will act to address harm caused by this business model.”
The FCA will now consider strengthening existing FCA rules or even banning this type of commission model or limiting broker discretion.
But at the other end of the scale, the FCA is also worried that lenders are wrongly turning down customers who can afford repayments because they're not carrying out proper affordability tests.
The FCA adds that it will now follow-up with individual firms using these dodgy tactics, while it expects all lenders and brokers to review their practices.
Research published by car repair firm Kwik Fit found that Brits are paying £1billion every month on car finance – and the motors cost 47 per cent more than they can afford to buy.
Here's how to get the best car finance deal as costs rise by 50 PER CENT in three years.
Plus, we explain what hire purchase, 0 per cent finance, PCP and personal leasing are.
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