Can I Get Car Finance Compensation?

Understanding Your Eligibility for Compensation

If you used car finance to purchase a vehicle at any point in the last 18 years, you might be eligible for compensation. This possibility arises from a recent court ruling regarding hidden commissions that lenders paid to dealers. The ruling has opened the door for potential payouts to millions of customers who may have been mis-sold finance products.

However, if you believe you are eligible, it's important to understand that there will be a waiting period. For now, experts advise against signing up with claims companies that promise to assist you in getting redress. These companies won't speed up the process and will charge a fee for their services.

Key Considerations for Eligibility

Most car buyers use motor finance, where they borrow money and pay in instalments over time. Some customers also pay monthly fees before making a so-called "balloon payment" at the end of the loan term. Car dealers typically receive a payment for their role in arranging the loan—a commission.

A Supreme Court ruling established that some dealers charged excessive fees or failed to adequately explain these charges to customers, which means those buyers could be entitled to compensation. The key factor is whether customers were treated fairly, although the Financial Conduct Authority (FCA) is still determining exactly what this means.

One specific group likely to be eligible includes people who took out car loans with discretionary commission arrangements (DCAs). These were banned in 2021, but prior to that, lenders allowed dealers to charge higher interest rates and earn a percentage of that as commission. If you still have your contract, you can check the terms and conditions to see if this applies to you.

What Constitutes Excessive Commission?

The Supreme Court ruled in a test case that Marcus Johnson was entitled to compensation, setting a reference point for future cases. Mr. Johnson claimed he was presented with an enormous amount of paperwork and did not read it all, trusting the sales representative to explain the deal. However, 55% of what he was paying for the car was commission.

Anyone paying commission at this level is likely to be eligible for compensation. However, it remains unclear how much lower rates would need to be to be considered fair, potentially ruling out some customers from receiving compensation.

Steps to Take if You Believe You Are Eligible

The FCA is setting up a compensation scheme, and in October, it will launch a six-week consultation on how the scheme should work. The first payments are expected to come in 2026. Therefore, you can simply wait until the scheme is available.

Alternatively, the charity Consumer Voice suggests writing to your lender now to establish the facts of your case. Lenders must acknowledge your complaint within eight weeks, and by submitting a complaint at this stage, you may get an indication of how likely you are to receive any redress, according to co-founder Alex Neill.

If you cannot remember the name of the lender involved, the car dealership should be able to help you. Consumer groups and the FCA advise against signing up with a claims company. Many of these companies advertise their services online, but they cannot proceed with a claim until the FCA scheme has been set up. If they do manage your case, they will take a cut of any compensation.

How Much Compensation Can You Expect?

It is not yet clear how much individual customers will be entitled to as compensation, although it is likely to be related to how much they were charged. A lot will depend on individual deals, including the type of car purchased.

Most claims are expected to be under £950, including around 3% in annual interest. Of course, anyone who has taken out several car finance deals in the last couple of decades could be entitled to more than one payout.