A shocking investigation by a British watchdog has discovered that car dealers are manipulating customers’ interest payments to earn larger commission totalling an ‘unacceptable’ £300 million each year.
The report comes almost two years after the Financial Conduct Authority (FCA) declared they would carry out mystery shopping trials of the industry and analyse millions of credit files.
On a mission for commission
In 2018, UK motorists borrowed a staggering £37billion on car finance to buy new and used vehicles. The popularity of loans such as Hire Purchase (HP) and Personal Contract Purchase (PCP) enable motorists to buy their car by paying instalments and mean big business for both car dealerships and lenders. In fact, Brits buy about nine out of ten new cars this way.
Yet, a recent investigation by the FCA found that lenders aren’t satisfactorily controlling the ‘conflicts of interest’ that are occurring from the extensive use of commission models that enable car dealers to make more in commission by deciding the interest rate.
Under certain commission models, the regulator estimates motorists can pay around £1,100 extra in interest charges over a four-year period for a typical car finance agreement on a £10,000 vehicle.
About 560,000 drivers have signed contracts where the loan price has a link to the level of commission received by the dealer, yet the watchdog discovered the bulk of dealers neglected to tell their customers they would receive a commission for setting up the loan.
How many car dealerships disclosed they would receive a commission on the sale?
Franchised car dealers: One in 37
Independent car dealers: Four in 60
Car supermarkets: Two in 14
Online brokers: Four in 11
‘Not good enough’
After uncovering serious concerns about car finance agreements from 20 lenders, making up about 60% of the market, the FCA has contacted car finance companies and says it’ll get tougher on the rules of car finance commission deals.
FCA Executive Director of Supervision – Retail and Authorisations, Jonathan Davidson, said:
“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.”
The FCA found a few dealers were only concerned whether their customer was a credit risk.
“This is simply not good enough and we expect firms to review their operations to address our concerns,” added Mr Davidson.
The watchdog is considering strengthening existing FCA rules, limiting the discretion that brokers have to set interest rates, and banning certain commission models.
For those firms identified as failing customers, the FCA will pursue them and take any necessary action.
Although this sounds like earlier mis-selling scandals such as Payment Protection Insurance (PPI), the FCA isn’t intending to make finance companies pay compensation to those customers who paid more than they should have, nor does it plan to do anything about any existing loans.
The motor finance trade body, the Financial Leasing Association (FLA), criticised the FCA’s report.
Adrian Dally, Head of Motor Finance for the FLA, 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.”
Navigating the options
If you’re planning on getting a new car, shop around using reputable retailers, compare finance deals, check the total amount you’ll need to pay back, and ask how much the broker or dealer will receive in commission.
If you can’t afford to pay for your next vehicle outright, the next cheapest option is to make a one-off payment using an unsecured personal loan but, unless you’ve got a great credit score, it’s doubtful that you’ll get approved and, by purchasing a vehicle this way instead of taking the finance offered by the finance arm of the manufacturer, you won’t get any money towards the car.
Personal car loans are both easy to understand and set up and you might also get the dealer to reduce the price due to being a cash buyer. Once you’ve paid the dealer, you own the car outright, although that also means you’re responsible for all the repairs!
HP and PCP deals work out more expensive and you don’t own the vehicle until you make the last— often large —payment.
If you buy a car using HP or PCP, try to pay off at least part of the balance with a credit card so you have the extra protection offered under Section 75 of the Consumer Credit Act, which states that the credit card company has joint responsibility with the retailer—useful if you make a future complaint.
What do you think of the FCA’s findings? Are drivers being ripped-off or pressured into finance they don’t understand and can’t afford? Tell us your views in the comments.
This is another example of the failure if the financial regulating body forcing the garages to pay compensation it’s misselling again
Well who’d have thought…..why wouldn’t car dealers stick their snouts in to the ‘rip off the motorist trough’, be it Government, Insurance Companies, Fuel Retailers, Transport for London, Parking Companies, County Councils, they all view the motorist as a cash cow, who they have a God given right to profit from.
Am I surprised NO
I recently bought a car from an authorised dealer. I had already decided to get a personal loan, but was subjected to some very determined selling of PCP. When they could see that I wasn’t going to go for that, they decided to sell me Gap Insurance. They even reduced the price of the Gap Insurance when I declined it first time around. I was made to feel that I was being foolish by not getting Gap Insurance.
I did manage to walk away without entering into any finance agreement, but I estimate I spent longer in discussions over finance (that I didn’t want and never asked for) than about the car itself.
I didn’t ask for or get any discount for ‘cash’. In fact, I was given the impression that they were doing me a favour by accepting my money – they would have probably been more accommodating if I had wanted/needed finance.
I don’t blame the individuals who work in the dealership. They are only doing what they are paid/incentivised to do. The only answer is tighter regulation, because otherwise there will be more and more people being sold finance that they can’t afford and are paying too much for. Another bubble waiting to burst?
Very well done you Paula…. they got me for thousands!
GAP insurance is definitely worth it when it’s needed.
I do agree that if you don’t buy a car through their finance methods but want to purchase a car outright they look at you as if you’re a hindrance to them. But am I shock? Nope, it’s called business. Happens in all businesses not just car sales.
All insurance is definately worth it when it’s needed.
Paula, they don’t want cash, can’t accept cash because they need to prove were the money came from under new laws for money laundering. As for gap insurance, it’s a very good idea, your new car may have lost 7 grand the second you drove it off the forecourt, your insurance only pays market value so if the worst happens your out of pocket. And if on cpc, oh dear you owe for the whole vehicle at list price.
My franchised dealer tried to bilk me for Gap insurance, but I knew it was available for a third of the price independently, and I found some insurance policies give you a minimal equivalent (replace as new) in the first two years – and you can still get Gap insurance up to two years after purchase from new. So it’s worth checking around, considering the benefits, and doing some sums before deciding – but dealer Gap insurance generally seems to be a rip-off.
I recently bought a car from a main dealer, haggled with them until they gave me a discount off the car “finance deposit contribution” and upped my PX allowance for using their PCP, I refused their GAP insurance at £1,000 and got the same cover online for £240.
I then cancelled the finance agreement in the 14 day cooling off period and paid off the loan benefiting from the discount I’d negotiated, play them at their own game!
Well played – might try that one myself
I’ve just purchased a used Jaguar F Pace using PCP over a four year period which on hindsight was the wrong thing to do. A personal loan over three years would have been cheaper. Never once was I told that the garage would be paid commission on selling the loan to me. Now I understand why they pushed/promoted the PCP so strongly. This is no different to the PPI and PLEVLIN scandal. It’s a wonder that Martin Lewis has not picked up on this.
Quick question! Do you work ‘for nothing’? Banks make a profit on loans, businesses make a profit on products, Supermarkets make profit on food! So a dealership will be paid a commission for handling the Finance company’s loan facility.
It’s so easy to be critical about a business operating for profit!
Not a charity!
Car sales man??? Your going down!! Hahaha
I think it is shocking I’ve bought many cars on pcp finance offerd by the dealers and never knew any of them were getting commission on it. I believe that they should be made to pay their customers back it’s shocking.
Really?? The whole process is about comission. You would need to be a right idiot not to realise that. Do the supermarkets tell you how much they pay the farmers/suppliers?? Does your painter and decorator tell you how much of a discount he gets when he bulk buys his supplies resulting in him earning more money?? People need to learn better negotiation skills to pay less.
Totally agree with everything you said,.
Cant believe so called educated people are so thick,there ignorance astounds me.
There should be no comma after said. Can’t has an apostrophe and I think you mean their rather than there.
Ewan must not have been to school, it’s how the world works, all the staff are on commission, the more they sell the better. Your car insurance broker is on commission to, as is your friend the bank manager or the staff member who deals with you. Ready for a holiday from being ripped off, your travel agent will be on commission, usually a % of the total cost!
Yes like the latest ‘bandwagon’ for claiming money back on, is poor ‘investment advice’!
Bet the people doing that for you will earn ‘commission’
Be fair someone has to pay the salaries or “remuneration” as they prefer to call it of the finance execs. I thought I had found an honest transparent up front mutual building society as they portray themselves in the television ads. Then I learned the Nationwide Building Society pay some of their execs millions of £ then add on expenses … not only a car but a driver as well. Mutual I can tell you there is buck all Mutual about them.
I used to own a car bought with PCP and I am actually shocked and surprised that car dealers are making extra money from lenders for suggesting their name. Most people would most probably trust the car dealer for setting up finance in the knowledge that it’s a good reputable lender. Little do we know that the lender might charge more that we would normally pay had we shopped around. There is only two obvious winners here, and since the lender pays commission to the car dealer….the buyer ends up paying the higher finance for the lender to cover the commission paid to the car dealer. Surely this can and should be challenged legally; car dealers should let the car buyer know of this at the time of purchase inquiry.
Yes we were ripped off when we took out a pcp deal on a second hand car. The independent dealer never mentioned the interest rate and also did not mention that he was to earn commission off the hire purchase agreement. Feel so ripped off and still paying it. To think they can set their own interest rate is scandalous! To know that they get away with this again is beyond acceptable and it should be recognised that they chose to omit that information and we were unaware of our rights. They told us not to bother with a bank loan as they had a car pcp deal which was better and no need for a credit check!!
Hold on a minute. Why would there not be commission involved for the dealer? How else would they make money from such payments and if they don’t make money, why would they bother offering them? Under PCP, you end up having use of the car for a period of time and for a price you have accepted as reasonable and also without a huge cash outlay. As cars depreciate in value the older they get and the more use you make of them, then no matter how you buy, what you have after some years, is worth less than you paid for it no matter how you paid. If you have the option to buy, then you can take that and own the car paying overall more than the selling price. BUT you have had use of it for a number of years without a huge cash outlay so where is the rip off there? If you choose to hand it back and not buy it, well you can take out another deal or buy a car if you have the cash. I really don’t see what the big deal is about this. How could any car dealership afford to effectively subsidise car ownership if they didn’t get a cut of the money when a deal is struck between a customer and a finance company they use. It’s not everyone who has time to shop around for the right kind of loan – why not use the one you are offered. It would be very niave not to think there was nothing in it for the car dealer
Interesting, just purchased a 2 year old Toyota from a Toyota main dealer.They were more interested in selling me Gap insurance, finance and protective treatment for the car than selling the car. I told them to stop wasting my time as I was a cash buyer. Started to walk away and in end got a good deal. (for me!!) Put some of the cost onto my credit card to get extra protection under the Consumer Credit Act.
Hi . Having read all the information provided I believe the customer should be refunded the overpayment directly from the finance company. It’s a fact to say that both statements are true, you are not advised at the time of purchase that the sales executive will be given commissions on deals . Neither do they meet the requirements under the pre contract disclosure . It’s a disgrace.
Ignorance is not an excuse, even in law
I have a car on finance for £7500 and I’ve discovered that over a 5 year period i will have paid back over £15000 now that is nothing short of pure greed and wants looking into because I’m sure that I’m just the tip of the iceberg
What do you mean by “discovered”?
Were you expecting to borrow £7500 and pay it back over five years interest-free????
No he/she wasn’t expecting to pay 100% interest!!! Another car sales man 🙄
As they would have said on Allo Allo , Screwa de motorist.
Good lord some people are stupid.
Of course car dealers are on a commission for the finance packages they push. It’s hardly an intricate scheme, is it!
The whole point of HP and PCP deals are to make the buyer pay more for buying a car than they would if they just provided the funds themselves. The finance company is effectively charging you a premium for borrowing their money and then just giving it back to them – IT’S A LOAN. It makes perfect sense for the finance company to pay a commission to the car dealer for successfully pushing a finance deal. This is really basic stuff.
Mind you, people who are silly enough to buy brand new cars in the first place are probably not the brightest sparks. Depreciation makes virtually all brand-new cars a bad investment. Anyone with any sense buys cars that are 18 months old and takes out a low-interest loan to do it, paying around £500 of the purchase price on a credit card in order to get S.75 CCA protection… if you can still find a dealer who will accept credit cards, that is.
As for GAP insurance: great concept. But if you buy it from a dealer as part of your car purchase, more fool you. You’ll get identical cover for half the price in ten minutes on the internet.
i have jus bought a car onPCP. They gave me £11,000 for my trade in car and said I could only put down somewhere in the region of £8,000 and they would give me a balance by way of a cheque. When I said I could not afford the monthly payments they said I could put down £10,122 and the rest paid to me by cheque, which would reduce my monthly payments. When I asked why in the first place they said I could only put about £8,000 they told me they thought I wanted the cash. This was not true, I never told them that.. I still do not understand the quotation and I queried what was £165 for a P pack (which I thought was for mats etc) and was told that was an Admin charge. Why does it say P pack and not Admin charge. Also I was told it had a Sat Nav but Mitsubishi now don’t put in Sat Navs as they say everyone uses Smart Phone (which I don’t have). My Son complained and they have given me a Tom Tom. I had a great SatNav in my Volvo.
I feel as an OAP that I have been given misleading information. WHAT CAN I DO?
3
Contact your Local Trading Standards department. Tell them you’d like to know if you have fallen victim to illegal selling techniques covered by the Consumer Protection from Unfair Trading Regulations, and if they would be prepared to investigate.
They will probably tell you they are massively understaffed (true) and underfunded (also true). You would be wise to play the “vulnerable consumer” card, if you can handle the idea of making yourself out to be the sort of OAP that shouldn’t really be handling their own finances anymore. The local councils run all the trading standards departments and they tend to be keen to be seen helping vulnerable old people.
And next time you decide you need to trade in a car to a dealer for £11k (meaning your car was likely worth around £13k), pause and ask yourself what exactly is wrong with your car. As for PCPs…. well. Make sure you read the small print. If you don’t understand it, don’t sign.
I have always bargained and negotiated car deals, been in business too long not to know how it works, BUT I did not know that the dealer sharks can set their own interest rates. This is step too far, and I for one will always ask to see how the interest on aPCP if I buy this way, never so far, is set.
BEWARE, we all know they have to make a living , but this is immoral and I hope will become illegal.
If you are stupid (or rich) enough to get into a finance deal you don’t know the rate/cost of, without checking alternatives, I don’t have a lot of sympathy. I bet you didn’t buy the car without comparing prices, so why buy finance without comparing?
On the other hand, to everyone saying “its a business, dealers need to make money”, i would point out the dealers business is selling cars, getting back handers from finance companies does seem a little underhanded (though not unexpected).