Car finance is one of the most popular ways to pay for a new vehicle, with more than 90% of new car purchases in 2020 funded by this type of plan, according to Car Expert.
However, following the introduction of new rules around the way car finance can be sold, thousands of people may have previously been mis-sold car finance and are making complaints, prompting a full-scale investigation from the Financial Conduct Authority.
In this article, we outline how car finance works and explain the investigation into what some are claiming could be the next PPI scandal.
What is car finance?
Car finance is a popular means of funding a purchase for a new or second-hand car. Simply put, it’s a loan that you take out with a lender – usually via a broker or car dealership – that allows you to buy and use a car straight away. You then repay the loan with interest on a monthly basis. After completing the loan term, you typically either own the car outright or return it, depending on what kind of contract you have.
You can read more about the details of car finance and the different kinds of contracts in our article Everything you need to know about car finance.
Were car finance loans mis-sold?
In January 2021, the financial regulator the Financial Conduct Authority (FCA) banned car finance lenders from making what are known as ‘discretionary commission arrangements’ with brokers.
These were deals where brokers were able to adjust interest rates offered to customers on a loan, and benefit from a bigger commission from the lender if the customer accepted the deal. In other words, brokers had a financial incentive to offer maximum rates to customers, meaning many people were likely overcharged for their loans.
An official statement from the FCA reads: “[Since we banned these arrangements] there have since been a high number of complaints from customers about how much they were charged before the ban. Providers (lenders and brokers) are rejecting most of these complaints, because they believe they haven’t acted unfairly and haven’t caused customers to lose out.”
Since the ban came into effect, over 10,000 people have contacted the Financial Ombudsman with concerns or complaints that they were overcharged on deals made prior to 2021. As a result, the FCA has now opened an investigation into the issue.
Can I claim compensation for my car finance loan?
According to the FCA, you may have been affected by this issue if you bought a car using a car finance scheme before the ban in January 2021. If you think you may have been overcharged, you can find out whether your broker had a discretionary commission arrangement with your lender by getting in touch with them, although if they did, it doesn’t necessarily mean you were mis-sold.
The investigation does not apply to customers who took out a Personal Contract Hire agreement – this is a loan where you effectively lease the car for a set time, and return it at the end of the term, so you never actually buy it. Only customers with Hire Purchase and Personal Contract Purchase contracts are part of the investigation.
It’s currently unclear how much affected customers could be entitled to. The FCA has said that once their investigation is completed, customers will be compensated “in an orderly, consistent and efficient way” if evidence of “widespread misconduct” is found. However, they have not elaborated on how these payouts will be calculated. The investigation was expected to be completed by 25 September 2024, but this has now been pushed back to May 2025.
Martin Lewis, founder of Moneysavingexpert, tweeted: “The payout would be either the interest on loans (which is big), the commission (which is big), or the whole loan (which is huge). We’re possibly talking thousands back for many”.
Law firm Pogust Goodhead has corroborated this, estimating that millions of drivers could be in line for payouts worth up to £4,000 each.
Can I make a complaint?
Under normal circumstances, car finance lenders would have an eight-week deadline to respond to customer complaints.
However, now that firms are under investigation by the FCA, this deadline for complaints has been frozen for the time being. If you make a complaint and it is covered by these temporary rules, the business has to inform you, but they do not have to attend to the complaint itself while the investigation is ongoing. However, once the investigation finishes in May next year, firms will then have until at least 4 December 2025 to give you a final response if you’ve made or make a complaint.
It may be worth making a complaint now anyway, however, in case the FCA does decide that lenders have to compensate car finance customers, but only those that have made a complaint.
You can make a complaint to the Financial Ombudsman as well, though they recommend contacting your lender first and waiting until you receive a final response from them before doing so. Since the deadline for lenders to respond to complaints has been frozen during the investigation, the Ombudsman has stated that customers will have 15 months from the date of any final response received between 12 July 2023 and 20 November 2024 to bring the case to them, instead of the usual six months.
This means that if you submit a complaint now and don’t hear back from the firm until after the deadline freeze ends, you will still have plenty of time to refer the case to the Ombudsman, should you need to.
If you want to make a complaint, you can use this free tool from MoneySavingExpert to do so. Simply enter some of the details about your car finance loan and it will draft an email on your behalf. More than 530,000 people sent complaint emails using the tool in the first seven days since launch.
You can also make a complaint if you feel like your car finance loan was mis-sold in other ways, for example, if there is anything you feel the lender did not make clear to you, or if making repayments is impacting your ability to meet your other financial responsibilities. It’s your lender’s job to make adequate affordability checks and ensure that you can afford repayments on a loan.
Beware of claims companies
You might remember seeing lots of adverts from companies offering help getting compensation during the infamous Payment Protection Insurance (PPI) scandal a fewl years ago. Many people are now reporting seeing ads across social media for similar companies offering their services to victims of car finance mis-selling.
Be careful about using these companies. It’s totally free to make a complaint on your own, but if you do so with a claims management company and receive compensation, they’ll take a fee, usually a percentage of your payout.
While it can be a hassle to make complaints and deal with difficult lenders yourself, it should save you lots of money if your claim ends up being successful.
Is it safe to buy with car finance?
The FCA’s new rules mean that borrowing money through car finance is much safer than it used to be, and it remains an extremely popular way of funding a car purchase.
However, remember to always read the terms of a loan agreement carefully, and never sign up for a loan that you think you will struggle to pay off. Always compare as many deals as possible instead of going for the first option available, as it will give you a better sense of the market, and give you confidence that you’re not paying over the odds.
You can read about more ways to keep motoring costs down with our guides 10 practical tips to reduce your car insurance premiums, 11 ways to keep fuel costs down and 12 ways to save on car and travel costs.
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