Millions of motorists who were mis-sold car finance agreements are due to receive £829 on average in compensation, it has been announced.
But why is this happening, and who can make a claim? Sky News explains…
The scandal
When you buy a car on finance, you are effectively loaned the money for the vehicle, which you pay off in monthly instalments. These loans carry interest, organised by brokers (the people who sell you the finance plan).
These brokers earn money in the form of a commission (which is a percentage of the interest payments).
Before January 2021, some car finance lenders had what was called a “discretionary commission arrangement” (DCA) with brokers.
Under these arrangements, brokers earned more commission if buyers were put on a higher interest rate – this incentivised sellers to maximise interest rates, which meant many were unfairly charged too much.
The Financial Conduct Authority (FCA) banned this practice in 2021, but many consumers complained they had been overcharged before the ban came into place.
Following legal action and an investigation, the watchdog said that car finance firms had either broken the law or its rules by not properly informing customers about commission paid by lenders.
Who will be eligible for compensation?
Car finance agreements taken out between 6 April 2007 and 1 November 2024, where commission was payable by the lender to the broker, will be considered for compensation.
But these will be split into two separate schemes. One will cover deals from 6 April 2007 to 31 March 2014, and the other covers deals from 1 April 2014 to 1 November 2024.
Around 12.1 million car finance deals will be eligible for compensation, with the average payout coming to £829, the FCA said.
People will only be considered for compensation if they were not told 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…
