Car buyers waste £300m a year on dealer commission
Customers could pay an unnecessary £1,100 extra in interest over a four-year loan, according to TotallyMoney.
The financial website has worked out how much car buyers could save by avoiding finance options at car dealerships, and searching for a better deal online.
The Financial Conduct Authority (FCA) announced in July that it was cracking down on unfair commission agreements.
The regulator will ban commission models that give motor finance brokers and dealers an incentive to raise customers’ finance costs from 28 January 2021.
The FCA calculated that the ban will save consumers about £165m a year but TotallyMoney said consumers are wasting a lot more than that figure on car finance.
The website found that nearly seven in 10 (68%) people have accepted the first car finance deal offered to them at a dealership, and that picking the wrong finance deal could result in paying an extra £1,100 in interest over a four-year loan.
A Finance and Leasing Association report in 2018, found that the majority of people (91%) buying a car were persuaded by car dealerships into taking out credit to help them with their purchase.
Research by the FCA found that buyers are typically sold a finance product based on a broker’s commission, rather than the customer’s creditworthiness.
Dealerships receive their commission from lenders based on the interest rate a customer gets, therefore incentivising the broker to increase the rate to earn more.
TotallyMoney says this often results in customers getting a car finance deal that costs them more than they need to pay.
Alastair Douglas, CEO of TotallyMoney, said: “A car is often a lifelong necessity and a large portion of someone’s monthly expenses. This is particularly important at the moment, as more people may be keen to avoid public transport amid the coronavirus crisis.
“But, car dealerships can sometimes seem unfair. The industry currently lacks competition, and at the point of sale the main focus is on the broker’s commission, rather than what is right for the customer.
“We wanted to change this. Our new car finance eligibility platform brings in creditworthiness as a top priority, so customers can get finance options that are right for their situation. We work closely with our lenders, so that customers see market-leading products that will work for them.”