CAR finance borrowers should save hundreds from next year as motor dealers will be banned from charging pricey interest rates.
Currently, car retailers and motor finance brokers receive commission, which is linked to the interest rate customers pay.
But firms can effectively set this interest rate themselves, which has created an incentive for them to sell more expensive credit.
Under the new rules, lenders will still be able to set their rate themselves but they won’t be able to use this rate as the basis for their commission, which should mean there’s less incentive to push rates up.
City watchdog, the Financial Conduct Authority (FCA), says banning this practice, known as “discretionary commission”, will see customers save a collective £165million a year.
That’s the equivalent to roughly £100 to £200 per person in interest costs.
The FCA points out that some customers will save significantly more, although a minority could see costs rise as a result.
Under today’s measures, the FCA has also said motor finance providers and other types of credit broker, such as those offering personal loans, will have to make it clearer to customers how they make commission.
All of these changes will come into force on January 28, 2021.
Christopher Woolard, the FCA’s interim chief executive, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”
Firms have been given until next year to comply with the rules due to the current coronavirus crisis making it harder to implement the change sooner.
When the epidemic first hit the UK, car finance lenders were told by the FCA to offer struggling borrowers up to three-month repayment holidays.
Earlier this month, the FCA extended this so dealers now have to offer repayment holidays until the end of October.
In addition, car finance lenders must consider reducing payments to a level customers can afford until October 31, while a ban on vehicles being repossessed has also been extended until this date.
Check out our guide on car finance deals for more information on how they work.