The Financial Conduct Authority (FCA) has revealed that consumers are being overcharged for car finance.

This follows the analyzing of data from 20 leading motor finance providers, a mystery shopping exercise and a survey of lenders that involved assessing affordability and exercise control over credit brokers. This now poses an opportunity for the car finance industry to be investigated and for new regulation to be added to protect motorists.

car finance industry

High-interest rates

Buyers who have been using debt in order to purchase a vehicle may have been overcharged by a staggering £1,000 per year in interest. The fundamental reason behind this is down to the way in which lenders pay commission to car dealers according to the FCA. Interest is being overcharged by certain motor dealers in order to be able to get a bigger commission payout. Overall, it is estimated that car finance is costing consumers over £300 million extra per year.

In addition, the FCA has stated in its report that over 95 per cent of the car finance industry (such as car dealership franchises, for example) had in place commission structures that aimed to encourage consumers to go for deals which were at higher interest rates, by providing incentives.

The growth of the car loan market

The problem of high-interest rates is compounded by the fact that the car loan market is booming. It is estimated that in 2018, at least 90 per cent of private vehicle sales across the country were financed by loans from banks or other credit providers.

The popularity of personal contract purchase plans

Furthermore, the majority of borrowers who opt to use credit to purchase their cars do so by taking out a personal contract purchase plan. In summary, this is usually arranged by car dealers or alternatively online motor finance brokers. What this involves, is paying a deposit, then a depreciation charge over a period of 24 or 36 months (working in a similar way to interest accrued on a loan). At the end of this term, the person has the choice of either trading the vehicle in, handing it back or paying off the rest of it and keeping the car. Given the popularity of these plans, it is why so many people are being overcharged on interest.

Lack of information

The FCA has also raised concerns that consumers are not being provided with sufficient information to start with when purchasing a vehicle on motor finance, helping them to make an informed decision. This was discovered after the FCA conducted mystery shops at over 122 motor retailers, which comprised over 37 that were franchised dealers, 60 independent retailers as well as 14 car supermarkets and 11 online brokers.

What will the FCA do?

At this moment in time, the FCA has not implemented any regulatory changes. Nevertheless, it has stated that it will be looking at the options available to them to intervene in the market to address the aforementioned problems.