If you’ve been looking into whether your car finance deal was mis-sold, you’ve probably come across terms like undisclosed commission, unfair interest rates, and something called a discretionary commission arrangement. It can be hard to know what they all mean, especially when they sound so similar.

In reality, these terms point to different types of mis-selling of car finance. And if either (or both) apply to your agreement, you could have a strong case for a refund.

In this article, we’ll break down what each of these issues really involves, how they’re linked, and how to figure out which might apply to you.

What Do We Mean by Undisclosed Commission?

Undisclosed commission refers to a situation where the finance provider paid a commission to the broker or car dealership, but never told you about it. This was surprisingly common in the motor finance industry until quite recently.

The problem isn’t just that someone else was earning money from your loan – it’s that you weren’t told. You may have believed the dealership was helping you get a competitive rate, when in fact they were earning more by offering a higher-cost option.

This type of concealed payment creates a conflict of interest. A broker who earns more money by increasing your monthly repayments is unlikely to be in your best interests. The Financial Conduct Authority (FCA) as well as Financial Ombudsman Service (FOS) have both stated this to be a serious concern.

What Counts as an Unfair Interest Rate?

An unfair interest rate is exactly what it sounds like – an interest rate that’s much higher than it should have been, based on your credit score, income, or overall borrowing profile.

Old commission structures were frequently associated with unfair rates. Car dealers had the power to set the interest rate on your loan, or to influence it, by way of a discretionary commission agreement. The greater number of commission they received, the greater the rate.

This gave dealers an obvious reason to increase costs for the customer. Instead of helping you save money, they could benefit financially by making your loan more expensive than necessary.

If you were charged a high APR and didn’t feel like you were offered other options, it could be worth questioning whether your rate was fair in the first place.

How the Two Issues Are Related

Finance agreements often contain hidden commissions as well as unjust interest rates, but they are not the same.

What an undisclosed commission refers to is what you were not informed about. It is a transparency issue.

An unfair interest rate is all about just how much you are billed. It is a cost issue.

Even if the rate was inside a typical range, the commission might have been hidden in some instances. In some cases, the rate might have been raised to achieve a higher commission. The two are problematic, but they indicate slightly different kinds of harm.

What the Regulators Say About It

In 2021 the FCA banned discretionary commission arrangements in the car finance industry. They claimed that these deals were no longer appropriate and had resulted in poor customer outcomes and high costs for customers.

The FOS, which handles complaints from consumers, has also been supporting claims related to both issues. If a dealership or broker failed to tell you about their commission – especially in a situation where they could influence your rate – your case is likely to be taken seriously.

The presence or absence of a disclosure is often key. If you weren’t told about the commission at all, that’s where a complaint can really stand up.

What the Law Says About Compensation

If you’re making a claim around undisclosed commission, the legal argument often falls under the Consumer Credit Act 1974, which deals with “unfair relationships” between lenders and borrowers.

Unfair interest rate complaints don’t always involve a breach of law, but they can still be valid on the grounds of fairness. If the deal wasn’t reasonable, or didn’t reflect your financial situation, the FOS can still recommend compensation.

In some cases, both legal and regulatory arguments apply at the same time – especially if the lender failed in their duty to act fairly and transparently.

Which Type of Claim Is Easier to Prove?

Undisclosed commission is usually more straightforward. All you need to show is that the broker or dealer received a payment and didn’t tell you. This can often be confirmed just by reviewing the paperwork. If your agreement doesn’t mention commission anywhere, that could be a strong indicator.

Unfair interest rates are a bit trickier. You’ll need to look at how your rate compares with what someone in your position would typically be offered. This might involve credit reports or industry comparisons. Still, if you were charged more than seems fair for your credit history, it’s worth looking into.

Can You Claim for Both?

Absolutely. In fact, it’s very common for both issues to appear in the same complaint.

If your dealer was allowed to set the interest rate and didn’t tell you about the commission they were earning, you could have been affected by both forms of mis-selling. That strengthens your case.

Let’s say you took out a Personal Contract Purchase (PCP) deal where the dealer could adjust the rate. They set it higher, earned more commission, and never mentioned any of it. That’s a clear example of mis-selling.

If you’re not sure what type of finance agreement you had or what terms applied, this guide to PCP and HP claims breaks down the differences and explains why both can be affected by commission-based mis-selling.

Working Out What Applies to You

Knowing what went wrong in your agreement can help you figure out how strong your case is – and what kind of refund you might be entitled to.

Some people are due a partial refund of interest. Others are entitled to much more, including compensation or updates to their credit report.

Reclaim247’s free online tool can help you check whether you’re eligible for a refund and what type of mis-selling might apply.

It also doesn’t matter if your finance agreement has ended. Even if you settled early or returned the car, you can still make a car finance claim.

And if you’re worried about the impact on your financial future, you can learn how making a PCP claim might affect your credit score or ability to get car finance again.

Final Thoughts

Undisclosed commission and unfair interest rates are both part of the wider car finance scandal that’s now under the spotlight across the UK.

One involves keeping you in the dark, and the other involves charging you more than you should have paid.

Car finance has been mis-sold to a huge number of people - and you could be one of them.

Reclaim247 can assist you in understanding what has occurred and what steps to take next. Use our free claim checker to see whether you could be owed a refund or compensation based on your finance agreement.