Car Dealers Overcharging Customers for Loans

Some drivers in the UK are being overcharged by over £1,000 by dealerships when taking out car finance loans, according to the Financial Conduct Authority.

The financial regulator said due to dealers setting their own interest rates, consumers are paying around £300 million more each year than they should be. According to their report, the widely used model which lets the brokers earn commission from higher interest rates has led to a conflict of interest that is unfair on borrowers.

“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,” said Jonathan Davidson, director of supervision for retail and authorisations at the FCA. “We estimate this could be costing consumers £300m annually. This is unacceptable and we will act to address harm caused by this business model.

“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”

The FCA launched their investigation into the car finance market back in April 2017, after concerns about the rise in consumer credit. The regulator sent out mystery shoppers as part of their research and found that dealerships were failing to disclose complete or clear information to customers about their finance deals.

Car finance is now by far the most popular way of buying cars in the UK, with over 90% of private car sales across the country in 2018 financed by some kind of loan, according to the Finance and Leasing Association.

Around four fifths of car finance agreements are personal contract purchases. These deals involve the driver paying a deposit for their car, and then paying off the depreciation in value of the car over a set time frame with interest, usually between 2-3 years. At the end of the deal, the customer then has the option to either give the car back, pay off the remaining value of the car as a balloon payment in order to keep it, or trade in the car for a new one using a new PCP.

The emergence of such loans has allowed people across the country to drive cars they wouldn’t otherwise be able to afford. But the FCA claims that consumers are still paying too much, pointing to the fact that over 95% of car finance brokers use commission models that encourage the dealers to charge higher interest rates.

However, the Finance and Leasing Association, who represent car finance providers, have claimed that the FCA’s findings are outdated with over 80% of their members not using commission models anymore.

Adrian Dally, head of motor finance at the FLA, said the FCA’s claims are “based largely on out-of-date information, and therefore does not reflect the very considerable progress the market has already made in moving away from such structures.”