Drivers across the UK lose a staggering £300m ($387m) to commission-based dealerships every year.
Customers could end up paying an extra £1,100 in interest on a four-year £10,000 finance agreement, the Financial Conduct Authority (FCA) warned.
Buyers are typically sold a finance product based on a broker’s commission, rather than the customer’s creditworthiness, the research found.
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.
This often results in customers getting a finance deal that costs them more than they need to pay.
Nine in 10 new car registrations in the UK are financed through dealerships, with 68% of people accepting the first deal offered to them, research by TotallyMoney found.
This means UK drivers could be collectively overcharged by about £300m a year.
The FCA is now attempting to stop on these practices, with discretionary commission models that are not in the customer’s best interests being banned from 2021.
Alastair Douglas, CEO of finance experts 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.
“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.”
TotallyFinance customers can now use its car finance eligibility platform to check what more affordable options are available to them.
Douglas said: “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.
“Checking your free credit report to better understand your financial situation could help you improve your credit rating, and help you find the best deals for your next car.”
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