The FCA bans hidden commission in car finance

In findings from March 2019 by the Financial Conduct Authority, it was established that within the motor finance sector, firms have been largely misinforming their customers in communicating commission structures often resulting in customers unknowingly paying more for their vehicle finance.

In June 2020, the FCA banned commission linked to car finance deals outright. This means that car finance brokers won’t be allowed to charge a commission based on the interest rate offered from January 28th 2021.

Has the mis-selling scandal affected me?

Customers who have bought a new car with a Personal Contract Purchase (PCP) deal may be at most risk of having been mis-sold a loan in this new scandal. These PCP deals can be complicated and involve a lot of small print in the contract. You may have been taken advantage of by dealers who have told you that you are getting a better deal or that a PCP deal is a much more cost-effective option than a Hire Purchase deal.

You may be caught out by a PCP contract due to the balloon payment at the end. A PCP deal works by making the cost of the loan equal to the amount the car is expected to depreciate over the course of the contract.

To make this more clear – if a car is initially valued at £15,000 at the beginning of your contract and the dealer expects it to depreciate in value to around £8,000 at the end of the deal, then you will pay the difference over the length of the contract. If you enter into a 2-year PCP deal, then you will pay £7,000 in monthly installments over that time.

If you then wish to keep the car at the end of your contract, you make a balloon payment. This covers the rest of the cost of the current worth of the car. So, if your car is now worth the expected £8,000, you will pay the extra £1,000 to gain ownership of the car.

You can end up paying a huge amount more in interest than you would on a Hire Purchase contract. Many dealers do not make it clear that the balloon payment at the end effectively makes it an interest-only loan that isn’t paid throughout your agreement. Therefore, the interest builds up much more quickly. The interest bill can be huge if you decide to buy the car outright later on.

There is usually nothing wrong with the PCP deal – it all comes down to how your dealer sells it to you. Dealers have been known to discuss the profit you can make from PCP deals, but profit is very much the wrong term to use. This ‘profit’ is just the money you have already paid to cover how much the dealer expected the car to depreciate – you have actually borrowed more money and paid more interest than necessary.