A ban on car finance commission deals where the salesman gets more cash if he signs you up to an expensive plan, comes into force today.
Financial Watchdog the FCA has put a stop to motor finance commission models that give brokers or dealers an incentive to set higher interest rates to customers to boost their commission.
As things stand, some car dealership and motor finance brokers are paid based on the interest rate drivers are charged.
That means brokers get better rewards for signing you up to worse deals.
But the FCA has now banned it - with the new rules coming into force today.
The FCA said on a typical motor finance agreement of £10,000, increasing commission under a Reducing Difference in Charges (DiC) model would mean the customer pays £1,100 more in interest over a four-year long agreement.
That's £275 extra a year - or an increase of around 50% in interest costs.
However, in a flat fee model, this disappears altogether.
FCA interim chief executive Christopher Woolard said: "By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.
"We estimate that consumers could save £165 million because of today’s action."
Sarah Coles, personal finance analyst, Hargreaves Lansdown, said customers should still act to avoid rip-off rates.
“Car salespeople hardly have a shining reputation for frank honesty and complete transparency, but still it’s hard to imagine how dealerships had been able to get away with this for so long. The system rewarded salespeople financially for setting higher interest rates, and so specifically incentivised them to act against the best interests of the customer.
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"The ban is a positive move, but it doesn’t mean anyone should automatically settle for a loan from a car company. Salespeople will still be able to earn commission on loans, and this cash has to come from somewhere, so there’s a risk you’re still going to pay over-the-odds.
"It’s always worth shopping around for the best possible interest rate before you go anywhere near the dealership. That way you’ll know whether what you’re being offered is good value for money, and can make a properly informed decision as to whether you want to take the financing deal or not
"The FCA will monitor how well firms are complying with the ban from September this year, to give firms a bit of extra time to get to grips with the new rules after lockdown."
