Car buyers overcharged millions on PCP finance

Watchdog says dealer-set interest rates cost some customers more than £1,000

New cars awaiting delivery
(Image credit: Carl Court/Getty Images)

Some car buyers who take out a loan on a new vehicle have been overcharged by more than £1,000, a study has found.

The Financial Conduct Authority (FCA) says the industry practice of car dealers setting their own interest rates is costing customers around £300m a year, the BBC reports. Dealers overcharge to increase their commission, the FCA concluded.

According to the broadcaster, four-fifths of new cars are purchased using Personal Contract Purchase (PCP) deals, where customers “rent” a vehicle from a dealer over the course of three to four years.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.


Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Once the period is over, consumers are given the option to either pay the car’s residual value for permanent ownership, use the remaining value to take out a new PCP deal or hand the car back.

However, the FCA claims car dealers are setting higher interest rates on PCP deals than if customers were to take out a bank loan, MoneySavingExpert reports.

The watchdog also states that dealers were not providing customers with “clear and understandable” information about PCP deals, meaning customers “may not have been able to make informed decisions”, adds the consumer website.

Jonathan Davidson, the FCA’s director of supervision, called the practice “unacceptable” and vowed to “address harm caused by this business model”, The Independent reports.

“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments,” he added. “This is simply not good enough and we expect firms to review their operations to address our concerns.”

The study has been criticised by the Finance and Leasing Association, which accuses the FCA of basing its research “largely on out-of-date information”.

The body argues that the FCA’s research “does not reflect the very considerable progress the market has already made in moving away from such structures”.

Continue reading for free

We hope you're enjoying The Week's refreshingly open-minded journalism.

Subscribed to The Week? Register your account with the same email as your subscription.