Car buyers could be paying too much interest on finance

Car buyers could be paying too much interest on finance as brokers look to increase the amount of money they make, the Financial Conduct Authority (FCA) has said.

Currently, some motor finance brokers receive commission based on the interest rate that customers pay. The broker can set that rate, with the commission structure encouraging some to potentially overcharge for car finance in a bid to earn more money.

Removing this financial incentive could save customers £165 million a year, says the FCA.

"We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance," said the FCA's executive director of strategy and competition, Christopher Woolard.

"By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money."

The FCA has said it is considering plans to ban commission models that give motor finance brokers/dealers an incentive to raise customers’ interest rates. 

The organisation also wants to introduce new rules which will give buyers more information about the commission they're paying to ensure they make an informed decision.

James Fairclough, CEO of AA Cars, believes the FCA's changes would be good for consumers and could bring the price of car finance down if it triggers greater competition on interest rates between lenders and removes the distorting effect of discretionary broker commission.

Commenting on the announcement, Fairclough said: “Transparency and clarity are essential for the car finance industry to serve customers properly, and the FCA’s proposal would make it easier for car buyers to compare different deals and shop around." 

The FCA is hosting a consultation on the proposals that will take place until 15 January 2020. The results will be published later in 2020.