Car finance loans

Your rights to compensation if you have been mis-sold a car finance loan and how to make a car finance claim.

The problem with car finance loan mis-selling

Over 900,000 car finance customers could be owed compensation for mis-sold car finance loans. The Financial Conduct Authority is currently using its powers to investigate whether car finance customers are owed compensation for being charged too much for car loans.

The problem dates back to before January 2021 when some car finance lenders allowed car brokers (the person who arranges your loan – for example, the car dealership) to set or adjust the interest rates they offered customers for car finance.

Car dealers were paid higher commission – known as a ‘discretionary commission arrangement’ – if they arranged a higher interest rate with their customers. This meant that car brokers had an incentive to increase how much people were charged for their car loan.

The financial regulator banned the use of discretionary commission in January 2021, after estimating around 924,000 customers could be paying £500 million in additional interest costs every year. Car finance customers could be owed around £1,100, based on a four-year £10,000 motor finance loan that used a discretionary commission arrangement. So the total bill could be a staggering £1 billion.

The ban in 2021 led to high numbers of compensation claims against car finance firms from customers who are worried about how much they were charged before the ban.  But car finance firms – lenders and brokers – have been found to be rejecting most of these complaints because they don’t think they’ve acted unfairly. This has led to thousands of car finance customers escalating their complaints to the Financial Ombudsman Service, which has found evidence of unfair commission arrangements.

The regulator has now stepped in to use its powers under the Financial Services and Markets Act 2000 to review motor finance commission arrangements and sales prior to the ban. 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’. 

Have you paid too much for car finance?

It’s free and straightforward to check with your car finance company whether you had a discretionary commission agreement. If you think you had discretionary commission added to your loan you can use our free templates to write to your finance provider. You may not get a final response until the financial regulator has finished its investigation but your provider does need to start investigating your complaint now.

What to do if you have been mis-sold car finance

It’s important that you raise a complaint within the time limit if you arranged a car finance agreement before 2021 for a new or used car, and suspect the interest you agreed was too high.

You have up to 6 years to do this. Don’t worry if you have missed this deadline. The regulator has said that you can complain within 3 years of becoming aware you had cause to complain. 

Separately, a collective action lawsuit has also been filed against some lenders on behalf of millions of customers who could have overpaid for their used  car finance before the 2021 ban. Use our tool to help you understand the different options available to you if you think you were charged too much for your car loan. The regulator has also published dedicated consumer guidance on what to do if this affects you.

Alex Neill, co-founder of Consumer Voice, shares her top tips if you think you might be eligible to claim

How long will it take to get a response to my claim? 

Car finance firms are being given longer than the usual eight weeks to provide a final response to complaints they get about credit agreements taken out before 28 January 2021. This applies to complaints received by firms from 17 November 2023 and on to 25 September 2024. 

This will be in place while the regulator completes its investigations of the car finance market – which it said in January will take 9 months (up to 25 September). After this, it will decide whether complaints should be handled in the usual way or whether special compensation arrangements need to be put in place. 

This delay to the usual complaints handling process doesn’t apply to complaints about other problems with car finance or complaints that have already been escalated to the Financial Ombudsman Service.

What to do if you had a car finance claim turned down

You are also being given longer to escalate your complaint to the Financial Ombudsman if you complained to your car finance company about higher than expected interest on loans agreed before January 2021 and had your complaint rejected.

You now have up to 15 months to escalate your complaint, rather than the usual 6 months. This extension applies to complaints where the firm sent you a final response between 12 July 2023 and 10 January 2024, or where the firm sent a final response during the period beginning 11 January 2024 and ending with 20 November 2024.

What should I do if I don’t hear back after complaining? 

Lenders have longer to investigate and provide a final response to your complaint but they are still expected to progress it while the regulator carries out its investigation. You should expect an acknowledgement of your complaint. The lender should also be in touch with you so it can collect evidence it needs to carry out its investigation. 

So if you don’t hear back then do get back in touch with your lender to ask for an update on where things are. If you are progressing a complaint via a CMC or law firm then they should keep you updated.

How to find out if you paid too much for your car finance loan 

Your lender will be able to tell you if they used a discretionary commission arrangement on  your car finance loan. Use our template letter to get in touch with your lender if you’re unsure whether you were charged too much on your car loan.

Collective action against Lloyds, MotoNovo and Santander car finance firms

The regulator isn’t alone in its action to seek compensation for drivers mis-sold car loans taken out before 2021.

Consumer advocate Doug Taylor last year launched a £1 billion collective action lawsuit representing around one million UK consumers who he said had unwittingly overpaid for car finance over a six year period before the 2021 ban.

He filed legal claims accusing Lloyds Banking Group, MotoNovo and Santander of anti-competitively inflating interest rates for finance agreements on used cars. Taylor is waiting for the competition court to give its permission to take this claim to trial.

Taylor has said: ‘We welcome the FCA’s recognition of the issues around car loans and the over-charging to consumers that may have resulted. We intend to engage actively with the FCA and await the outcome of its diagnostic process with interest. 

‘We filed our opt-out collective action in July 2023, seeking compensation through the Courts for consumers who bought second hand cars between October 2015 and January 2021. 

‘These affected consumers are automatically included in our action and therefore need take no action until the FCA is clearer as to what, if any, compensation will be put in place.’

What is car finance?

If you bought your car from a dealer or broker then the chances are you were offered a finance loan to help you pay off a car in fixed instalments. According to industry statistics, there are 6.2 million car finance contracts currently in operation – with £51 billion in new car finance lending in 2022 alone. 

When you buy a new or used car with a car finance loan, the car dealership sells the car to a finance company who then owns the car. The finance company allows you to use the car in return for the monthly payments you make according to your car finance agreement.

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.

Our mate Martyn James – consumer rights campaigner, TV and radio broadcaster and journalist – shares more about how car finance deals work.

Problems with car finance loans

Problems with car finance loans extend beyond paying higher interest rates. You can also take action if you think you’ve experienced any of the following:

• Your car finance agreement was mis-sold or mis-described. You were misled into taking out the contract or signing up to terms you didn’t agree to.
• You were sold a car loan that you can’t afford. If you were pushed into taking out a more expensive deal than you wanted.
• You have been hit with unexpected charges. If you’ve been asked to pay charges – such as excess mileage or damage charges – at the end of the agreement. 
• You have experienced financial difficulties and haven’t been treated fairly. The lender passed your debt to a private debt collector rather than step in to help.
• Your car is faulty or not of satisfactory quality. 

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 things like the balloon payment. 

Be prepared 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 if you signed up to your loan years ago. 

The financial 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.

Complaining about car finance

Car finance is regulated by the Financial Conduct Authority so car dealerships and lenders have to follow strict rules about the sale.

If you have a problem, complain first to your car finance dealer or lender because they need to be given a chance to put things right. 

They have up to eight weeks to respond to most types of complaints. These complaint rules have been temporarily changed for complaints about motor finance agreements taken out before January 2021 with discretionary commission arrangements.

If you’re unhappy with the response or you didn’t get one then you can take your complaint to the Financial Ombudsman Service – an independent dispute resolution service.

Car finance company contacts

Here are links to some of the major car finance company contact details. Use our template letter to get in touch with your car finance lender.