Drivers mis-sold car finance loans could be losing out on compensation

Consumer Voice has joined forces with leading consumer rights campaigner Martyn James to talk car finance mis-selling.

*UPDATE: Since we published this story the Financial Conduct Authority has launched a major investigate whether car finance customers are owed compensation for being charged too much for car loans. It is looking at whether car finance customers are owed compensation for being charged too much for car loans and has said it will ensure consumers are paid what they’re owed if it finds ‘widespread misconduct’. Read our latest guide to understand what your options are for claiming car finance compensation.*

The last year has seen rising numbers of car finance customers claiming compensation for secret and unfair commission payments that have impacted what they’ve paid. 

The Financial Ombudsman Service, which handles consumer complaints about financial products, saw an 85% increase in complaints about car finance over the last year. It saw 11,446 complaints between April 2022 and March 2023, and 3,678 in the first quarter of this financial year. It says most of these are about car finance commission.

Consumer advocate Doug Taylor filed legal claims in August 2023 on behalf of around one million UK consumers who he said had unwittingly overpaid for car finance over a six year period – to the tune of £1 billion.  

Problems with car finance commission date back to before 2021 when car dealers could set the interest rates drivers would pay for their car finance deal. Dealers were paid higher commission – known as ‘discretionary commission’ – if they arranged a higher interest rate with their customer.

A Financial Conduct Authority investigation in 2019 estimated this could be costing consumers £165 million a year. It banned the use of discretionary commission in January 2021 saying it unfairly incentivised dealers to raise customers’ costs, resulting in them paying too much. 

This benefited anyone arranging a car finance deal after January 2021 but drivers who entered into car finance agreements before then could be out of pocket due to paying higher interest rates. If this is you, we can help you consider your options for claiming back compensation. 

Alex Neill, co-founder of Consumer Voice, said:

‘There’s more than one way to  get back what you’re owed from rip-off car finance deals so make sure you understand all your options. There are potentially millions of consumers who are owed billions of pounds as a result of problems with their finance deals.  

‘Don’t be put off claiming for fear of the process or whether you think you’re eligible. If you think you may be owed money, use our tool to help you to start the process of making your claim.’

Paying a cost to claim compensation

Not all options will give you back every penny you’re owed. The ombudsman estimates around 90% of its complaints about car finance commission payments have been brought by ‘third-party representatives’ – claims management companies or law firms.

Claims management companies (CMCs) and law firms pursuing individual claims will charge you a fee. You could use a CMC but there are free and simple ways to claim car commission compensation yourself – and doing this means you will keep all the money you’re awarded.

An ombudsman spokesperson told Consumer Voice: ‘We have received an increase in car finance commission complaints over the last year. These are primarily driven by complaints brought by third parties on behalf of consumers although we are clear that consumers do not need representation to bring a complaint to our free, independent service.’

Free ways to claim compensation for car finance mis-selling 

If you arranged a car finance agreement before 2021 and suspect the interest agreed was too high then you could take action yourself or, if you’re eligible, you could wait to see how Taylor’s collective action lawsuit progresses. 

If you’re taking action yourself then you will need to provide any documentation you have from when you signed your car finance deal – particularly the ‘Initial Disclosure Document.’ That won’t always be straightforward. ‘Some of these cases are historic sales from many years ago, so people may not have much evidence to hand,’ said an ombudsman spokesperson.

The ombudsman has said you shouldn’t worry if you don’t still have your documents as it will still investigate any complaint you make using its service.

You could also be eligible to claim for free if Doug Taylor’s lawsuit is successful. Taylor is accusing Lloyds Banking Group, MotoNovo and Santander of anti-competitively inflating interest rates for finance agreements on used cars.

The claims aim to recover the losses on behalf of around one million consumers who entered into finance agreements for used cars with one of these providers between 1 October 2015 and 27 January 2021. Taylor is waiting for permission from the competition court to go to trial. This case is at a very early stage and it’s important to be aware that it could take several years to reach a conclusion. 

Belinda Hollway, partner at Scott + Scott, the law firm acting for Taylor in his claim, said: ‘If the claim succeeds – either by being settled or at trial – people who have been affected can simply come forward and claim their damages. They don’t need to find and instruct lawyers and they don’t need to try to recall all the details around their car purchasing transaction. Basically, less work and less cost to them.’

Affected customers won’t immediately need to produce any record to join the claim. ‘Though they may have to at the point at which the damages are being distributed – but that’s in the situation where the money is already on the table,’ said Hollway.

Don’t panic if you already have a complaint with the ombudsman via a claims management company. If it’s unsuccessful you won’t pay anything and there is still a chance you would be eligible to claim to join one of these collective action lawsuits.

Hollway said: ‘You can’t be compensated for the same loss twice but you won’t necessarily be precluded from participating even if you’ve tried and failed to claim for the same loss on a different legal basis.’

Sign up to Consumer Voice to be kept updated about this claim or use our tool to explore the different options available to you. 

Your options for claiming car finance commission compensation

What is car finance?

If you bought your car from a dealer or broker then the chances are you were offered a finance deal to help you pay off a car in fixed instalments. There are different ways of buying a car on finance, including these three main types:

Car finance deal	What it offers
Hire purchase agreement or personal contract purchase (PCP) agreement	You hire the car by paying in instalments. You can become the legal owner of the car by making a ‘balloon payment’ at the end of the agreement.
Conditional sale agreement	Typically expects you to buy the car at the end of the agreement, though most agreements now offer an option to return the car.
Hire or lease agreement	The finance provider owns the car throughout and ownership of the car remains with the hiring company.

How car finance deals work and problems you might face  

There are 6.2 million car finance contracts currently in operation – with £51 billion in new car finance lending in 2022 alone. Car finance agreements are notorious in the financial services industry for being exceptionally complicated. 

That means lots of things can go wrong. In addition, the agreements are usually sold by people who may not fully understand the complexities of how this type of lending works – or are so focused on the sale they cut corners.

Here’s how the deals work

• You pay a deposit that covers some of the value of the car (not the full amount).
• You agree to take out a credit deal for a large amount of the cost of the vehicle – but not the whole amount. You pay interest on the amount you’ve borrowed for the duration of the credit agreement. This is usually three to five years.
• This leaves another big percentage of the overall cost of the car that hasn’t been paid off. At the end of the term, you have the option to buy the car outright by making a ‘balloon’ payment This is the amount outstanding needed to buy the car outright. To complicate things, the value of your car will have decreased over time so the business estimates what that final value will be when you take out the agreement.
• In theory you could be left with a smaller balloon payment than the business anticipated at the end of the deal. This would mean it would cost less to purchase. In practice, this is rare.
• Some agreements are sold with a ‘promise’ that you could have credit towards a new car at the end of the deal. This is extremely complicated, but works on the basis that if you were to sell the car for a higher sum than the final value, you’d get some credit. This is not common and ‘guarantees’ of credit indicate mis-sold loans.
• In addition, there will also be other charges that come into play at the end of the deal. These include a mileage limit – with charges by the mile for every mile you are over the agreed limit in your contract.
• You’ll also have to pay for damage, even minor damage, to the vehicle. This used to be covered by the business under old hire purchase agreements.  
• Because of this you’ll be sold insurance policies or service contracts to cover you for various things that could cause damage. These policies can be very expensive and can add over £1,200 to your bill. That’s on top of the standard car insurance you are required to take out by law.

Things that can go wrong with car financing

Because car financing agreements are enormously complicated, there are many potential things that can go wrong.

Mis-selling. This can include things like the affordability of the finance and agreement, if you were misled into taking out the contract or if you were pushed into taking out a more expensive deal than you wanted.

Financial difficulties. This can include repossessing your car, hitting you with charges and debt collection. In simple terms, if you’re unable to afford the credit agreement and are in financial difficulty, the firm can pass your debt to a private debt collector rather than step in to help.  

Excessive charges. Lots of other problems can arise at the end of the deal, including; unexpected or unexplained charges and costs, excessive charges for damage and/or mileage, not getting the promised credit refund, problems over the size of the balloon payment, problems cancelling mid-term, refunds and more.

Add-on insurance products. You can also complain about any additional insurance products you were sold, including cover for hubcaps, alloys, bumpers, windscreen and more. You can also complain to the insurer about claims problems.

Taking action when things go wrong with car financing

Car finance is regulated by the Financial Conduct Authority so even the car dealership that sold you the deal has to follow strict rules about the sale. The dealer needs to make it clear how the deal works and the charges you might face. They should not over-promise and should explain how they have worked out the balloon payment.

Keep your documents and what you understood about the deal from the person who sold it to you. And if the retailer doesn’t sort it out, you can take the case to the Financial Ombudsman. All of this is free – and straightforward. So if you feel you’ve been misled, don’t give up – take it further.