Car finance commission to be banned – how much will you save? from wisepowder's blog

Car finance commission to be banned – how much will you save?

Salespeople are often rewarded in commission for high levels of sales, but the ways the commission is calculated vary and can be complex. An investigation last year by the FCA revealed that when it comes to arranging some types of credit – such as car finance – certain forms of commission have been incentivising sellers to unfairly hike the prices on deals, potentially leaving customers collectively overpaying by hundreds of millions of pounds every year.To get more auto finance news, you can visit shine news official website.

More than nine in 10 new cars were sold using car finance schemes in the past year. Under typical finance deals, you borrow a sum of money towards the cost of the car, which is then repaid monthly – with interest – over a set term. The money is usually lent by a finance company, such as a bank, but the deals themselves are arranged by car dealers or brokers, who are paid commission for setting up the loan. Under some existing models of commission, which the FCA reports to be ‘widespread’, the amount paid to brokers rises in line with the interest rate on the finance deal. Furthermore, under some arrangements, brokers can also control the interest rates set on individual deals. This effectively means they stand to earn more commission by making credit deals more expensive than they need to be for customers.

The FCA is now banning such types of commission – a measure due to come into effect on 28 January 2021. Firms will also have to give customers more information about the commission they are paying when entering into finance deals. An FCA spokesperson commented: ‘By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protection for consumers.’

The watchdog’s analysis found that where deals are arranged through commission models like this, interest rates are routinely higher. The FCA reckons the ban could save customers £165m a year. With one of the commission models investigated, a typical customer on a four-year finance deal for a £10,000 car would be likely to pay around £1,100 more in interest than if the broker were paid a fixed fee.

The watchdog’s analysis found that where deals are arranged through commission models like this, interest rates are routinely higher. The FCA reckons the ban could save customers £165m a year. With one of the commission models investigated, a typical customer on a four-year finance deal for a £10,000 car would be likely to pay around £1,100 more in interest than if the broker were paid a fixed fee.