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17 May 2019
Chris Torney Chris Torney

Car buyers overcharged by more than £1000 for loans


The Financial Conduct Authority (FCA) has warned that car buyers are overcharged by more than £1,000 when taking out a loan

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Car buyers are losing out to the tune of as much as £1,000 each when they take out loans to fund their purchases.

This is according to City regulator the Financial Conduct Authority (FCA), which recently published the results of its two-year investigation into the UK’s motor-credit market.

The watchdog has found that consumers have suffered considerable financial losses due to the fact that car dealers have been allowed to set their own rates of interest on loan packages.

The FCA said that, because the level of commission received by dealers from banks and other lenders was based on interest rates, firms had a clear incentive to impose higher charges – with buyers left to foot the inflated bills.

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Dealers 'failing to disclose' information to buyers

Jonathan Davidson at the FCA 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.

We estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model.”

Inflated interest rates were not the only issue uncovered by the FCA during its probe of the sector.

The regulator also found that many dealers were failing to disclose adequate information to would-be borrowers about the contracts they were about to sign – for example, the potential consequences of missing repayments.

In other cases, firms failed to carry out the necessary affordability or creditworthiness checks on customers, which meant that some borrowers risked taking out car loans that they did not have sufficient means to repay.

Read more: Car finance traps to avoid

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Davidson added: “This is simply not good enough and we expect firms to review their operations to address our concerns.”

The watchdog has yet to decide what action it plans to take against businesses it has found to be acting against consumers’ interests. The options thought to be on the table include an outright ban on the type of interest-based commission level described above.

However, Adrian Dally from industry body the Finance and Leasing Association said the FCA’s report did not reflect the current state of the market.

“We welcome the FCA’s recognition of the work done by motor finance lenders to provide training for motor dealers, and the positive impact this has had in meeting customer needs,” he said.

“Regarding the FCA’s concerns about commission structures, their survey work is 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.

We look forward to working with the FCA as it modernises its regulations in line with market best practice."

Read more: Car finance jargon buster

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Debt bubble could put the economy at risk

The FCA launched its inquiry into the motor finance sector in 2017 amid fears that the huge increase in the size of the car-credit market over recent years could create a debt bubble that put the UK economy at risk.

One of the regulator’s biggest concerns has been the relatively complex nature of new types of credit such as personal contract purchase (PCP) deals. PCP offers have been particularly popular thanks to what have in the main been relatively low interest rates.

PCP loans – which typically run over a three-year period – are generally structured so that customers have the option of making a large lump-sum “balloon” payment at the end of the term in order to purchase the vehicle outright.

This has led to worries that many borrowers do not understand the implications of the loans they are taking out.

In particular, buyers who find themselves unable to meet their monthly repayments on a PCP loan could find that, in order to exit the deal, they not only have to hand back their car but also settle their outstanding debt – which could be significantly more than the current value of the vehicle.


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