Car finance compensation: What is the latest update with payouts for millions of drivers?

There’s currently a delay to the car finance compensation scheme beginning because two challenges have been launched – so what exactly is going on?

After years of consultations and debates, a compensation scheme for people mis-sold car finance deals was announced earlier this year by the Financial Conduct Authority (FCA).

Since then, I’ve been hit by wave after wave of adverts, emails and texts from claims management companies telling me to the penny how much compensation I’ll get. Which is interesting… because I can’t drive.

Now that we’ve established that many of those claims companies are faking it, what about your actual compensation? Well, it’s automatic, though you can put a claim in to speed things up.

However, there’s currently a delay to the scheme beginning because two challenges have been launched. One that says we should get more cash – and one that says we should get less.

Here’s a guide to all you need to know. Don’t forget that my supermassive guide to car finance claims is available on the Mirror Online website.

What’s the problem?

If you’ve bought a car or vehicle in the last two decades, chances are you’ve taken out a Personal Contract Plan (PCP). Many finance agreements contained large ‘hidden’ commission payments.

You won’t necessarily know if you’ve been overcharged as your contract may not have made this clear. But you could have been charged too much interest and/or had an unreasonably large amount of commission added to your total borrowing.

What are the key car finance compensation scheme facts?

Here’s what you need to know:

• You need to have been sold a motor finance agreement between 06 April 2007 and 01 November 2024.
• The compensation scheme only applies if you were misled in to taking out an unfair contract, given inaccurate information or excessive commission was paid by the lender to the broker,
• It’s estimated that the scheme will apply to around four in ten car loans (40%) sold during this period.
• The FCA estimates that up to 12.1 million loans could be applicable for compensation.
• The total costs of the scheme will be around £9.1 billion including administration costs.
• The average payout is predicted to be £829 – but that sum will very much vary depending on the circumstances.

What’s going on with the challenges to the compensation scheme?

Consumer Voice, the free service that brings together information about legal cases brought on our behalf, has launched a challenge to the compensation scheme.

The way that the current scheme works out compensation is so ludicrously complicated it took me a week to fully absorb its complexities. But put simply, because the compensation calculation uses averages and approximations, Consumer Voice argues that you may not get the full amount of compensation for money you have lost that you are entitled to.

I interviewed Alex and Nikki from Consumer Voice about this claim recently – coming to social media soon – and they emphasised that this legal challenge should only delay the case till roughly the end of the year.

But wait! Three car finance providers have also launched a legal challenge to the compensation scheme that suggests it’s unfair to lenders (too generous). This will also be considered by the courts (the Upper Tribunal).

So what about the compensation scheme then? Well, the FCA has made it clear that it expects the businesses involved to carry on looking for all the people affected, even though the scheme isn’t currently operating. So your lenders should be going through their records, identifying their customers and contacting them.

What happens if I’ve complained already?

If you’re one of the four million people who’ve already complained, you’ll be contacted first once the scheme starts. You will be automatically included in the compensation guidelines as set by the FCA, unless you contact the lender to say otherwise.

What if I’ve not complained?

If you’ve not made a complaint yet, you have two options. You can wait for the lender (the firm that provided the credit) to contact you. Or you can make a claim to them now. In theory, you’ll be processed quicker if you register a complaint. But given the volumes of people who may be entitled to compensation, it makes sense to gather as much information as you can now so you can speed up the process.

Alternatively, the lender should contact you if you’re likely to qualify for compensation. The timescales for being contacted depend on when your policy was sold.

Can I trust the business to contact me?

If you’ve not been contacted, now is the time to start tracking down your old agreements. If you are struggling to find them, your credit reference report may list old deals and bank statements could help you figure out who the lenders were. Some credit reference agencies have apps that will allow you to do this much more easily. Make sure you’ve asked for your free credit file, not the ‘paid for’ service.

If you’ve already been compensated, or the Financial Ombudsman or lender rejected your claim, you should be contacted if you are entitled to further compensation. You can find out information and download template letters on free websites like Consumer Voice and MoneySavingExpert.

How much compensation will I get?

So how is the current compensation scheme calculated? This is the simplest way I can describe how the compensation works for most agreements:

• Look at the total interest you paid on the agreement. You should get 17% for vehicles sold after April 2014 and 21% for deals sold before.
• Add this figure to the commission you paid.
• Divide by two
• Add interest on top (there is a separate calculation for year-on-year interest rates).

You’ll get a letter with the calculations on it if a compensation offer is made, which you can then ask the firm to explain if you are unsure, or complain about if you think it’s wrong.

Do I need to use claims management companies and solicitor firms?

Claims management companies or CMCs are firms that will bring complaints or claims on your behalf for a fee. You do not need to use them to claim compensation under the FCA’s scheme. You’re throwing your money away.

• Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist