Rip-off car finance deals to be banned
Financial watchdog cracks down on expensive commission-linked deals
Tue, 07/28/2020 – 11:07
Motorists could pay £165 million less for car finance under plans from the Financial Conduct Authority (FCA) to ban deals where the seller’s commission is based on the interest paid by drivers.
Currently, some car dealers get more commission for selling a customer a car finance deal with a high interest rate.
This conflict of interest incentivises them to sell customers more expensive deals than they need.
The FCA has investigated the car finance industry using mystery shoppers.
It found widespread misuse of this type of commission in an earlier review of the car finance market. It estimated customers could save £165 million a year as a result of the changes.
The ban will come into force from 28 January 2021.
Christopher Woolard, FCA interim chief executive, says: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”
What is car finance?
When you buy a car, some dealers will offer you a finance scheme to pay.
There are three types of car finance:
- Hire purchase: A loan secured against the vehicle itself. This means that you do not own the car until you have made the final payment. You also will not be able to sell without the lenders permission.
- Personal contract purchase (PCP): You will pay fixed instalments over a set period of time. At the end of this period you will either pay a lump sum, known as a “balloon payment”, to purchase the car or you can opt to return it to the seller.
- Personal leasing: This allows you to lease a car using low monthly payments but you will not be able to buy it at the end.
Car finance risks to beware of
Used properly, car finance can be a suitable option for purchasing a vehicle.
There are some pitfalls to beware of. The first is that if you miss a payment, it could result in your car being repossessed.
With PCP, you will need to ensure you have enough money to make a balloon payment by the end of your contract, which usually lasts two to our years.
Failing to do so will result in your car being taken back by the lender.