Car finance scam: four questions and answers you need to know

Millions of motorists who were wrongly sold car finance contracts will receive an average of £829 in compensation, it has been announced.

But why is the scam happening and who can claim it? Sky News tells…

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When you buy a car on finance, you are effectively loaned money for the vehicle, which you repay in monthly instalments. These loans charge interest, which is organised by brokers (people who sell you finance plans).

These brokers earn money in the form of commission (which is a percentage of the interest payment).

Before January 2021, some car finance lenders had “discretionary commission arrangements” (DCA) with brokers.

Under these arrangements, brokers earned more commission if buyers placed a higher interest rate – this gave sellers an incentive to maximise interest rates, which meant that many were unfairly charged too much.

The Financial Conduct Authority (FCA) banned the practice in 2021, but many consumers complained that they were overcharged before the ban was implemented.

next legal action And in an investigation, the watchdog said car finance companies broke either the law or its rules by not properly informing customers about commissions paid by lenders.

Who will be eligible for compensation?

Car finance agreements entered into between April 6, 2007, and November 1, 2024, where commission was payable by the lender to the broker, will be considered for compensation.

But these will be divided into two separate schemes. One will include deals from April 6, 2007, to March 31, 2014, and the other will include deals from April 1, 2014, to November 1, 2024.

The FCA said around 12.1 million car finance deals would be eligible for compensation, with the average payout being £829.

People will only be considered for compensation if they were not told the details of at least one of three car-finance arrangements between their lender and their broker.

These three arrangements are:

1. A discretionary commission arrangement (DCA) – This type of arrangement would allow the broker to adjust the interest rate paid by the client in order to receive more commission.

2. A high commission arrangement – ​​This includes any deal where the commission was at least 39% of the total cost of credit and equal to or greater than 10% of the loan.

3. Contractual Relationship – In these arrangements a lender will be given exclusivity or a right of first refusal.

This will apply except in cases where the lender can prove that there was a direct relationship with the manufacturer and the dealer.

However, there are some exceptions.

Matters will be considered fair if:

• Commissions for agreements initiated before 1 April 2014 were £120 or less and from that date onwards, they were £150 or less.
• No interest was charged to the borrower.
• DCA was not used to earn discretionary commission.
• The lender may, in some limited circumstances, prove that disclosing one of the above arrangements was unreasonable or harmed the consumer.

How will I be compensated?

If you had a car finance agreement between 6 April 2007 and 1 November 2024, it is worth lodging a complaint with your lender if you haven’t already done so.

Consumer champion Martin Lewis told BBC Radio 4 that many people “won’t even know” if their car financing has been mis-sold until it happens.

The FCA advises that people lodge a complaint with their lender using a template letter on the website.

It says there is no need to use a claims management company or law firm, warning that doing so could mean you lose more than 30% of the money received.

Those who have already complained, or those who complain by August 31, are likely to get compensation first.

Lenders will also contact eligible customers, even if they don’t file a complaint.

How long will lenders have to tell drivers how much they owe?

To give companies time to prepare, the FCA has imposed a “short implementation period”.

This means they will not have to take action before June 30 for loans taken after April 1, 2014, or before August 31 for loans taken before.

Lenders will have three months from these dates to inform drivers about their compensation eligibility and the amount.

Customers who have enquired about their car loan should be told whether they qualify and how much they can receive by the end of this year.

The companies have until the end of 2026 to contact people with car loans affected since April 1, 2014, who have not made any complaints.

For those with old loan agreements, they will have until the end of February 2027 to complete it.

Lenders will contact only people who have not complained if they are likely to owe money.

If consumers want to join the respective schemes, then they will have to respond within six months of these dates.

Anyone who has not been contacted has until August 31, 2027, to make a claim.

When will the compensation be given?

The FCA said millions of people should get compensation this year.

Lenders should aim to hand over payments by January 2027 to those who have already complained or who complain before the end of the implementation period.

This group of people will be the first to receive payments.

FCA CEO Nikhil Rathi said that lenders can start making payments tomorrow if they want because the rules of the resolution scheme have now come out.

But he warned that such an outcome was very unlikely.

“We would be glad if lenders could start moving rapidly, because consumers have been waiting a long time,” he said.

The FCA anticipates that most claims will reach a resolution by January 2028.

But consumers concerned that their lender is not following the scheme’s rules can file a complaint with their lender or the Financial Ombudsman Service.