Car Finance Compensation: What UK Drivers Need to Know in 2025

Car Finance Compensation: What UK Drivers Need to Know in 2025

Millions of UK drivers who took out car finance between April 2007 and November 2024 may be owed car finance compensation under a scheme published by the Financial Conduct Authority (FCA). Average payouts are expected to be around £829 per mis-sold agreement, and the total cost to the industry could reach £9.1 billion. You do not need a lawyer or a claims management company — the scheme is designed to be free for consumers to use.

Here is a plain-English breakdown of what happened, who is affected, and what steps to take.

What's happening

For many years, car dealers were paid commission by finance lenders based on the interest rate they charged customers. The higher the rate, the more commission the dealer earned. These arrangements — known as discretionary commission arrangements (DCAs) — gave dealers a direct financial incentive to charge buyers more than necessary, and customers were typically not told about them.

The FCA banned DCAs in January 2021. Following a review and a series of Supreme Court test cases, the regulator concluded that a large number of car finance agreements were unfair. One of the key test cases involved Marcus Johnson, who bought a Suzuki Swift in 2017. The Supreme Court found that the terms of his finance deal were unfair because of the size of the commission payment and because he appeared to have been misled about the relationship between the finance firm and the dealer.

Beyond DCAs, some customers were also found to have signed unfair contracts because the commission paid to the dealer was disproportionately high — accounting for at least 35% of the total cost of credit and 10% of the loan. Others were not given accurate information about the best available finance deal due to exclusive arrangements between dealers and lenders.

The FCA's scheme applies to approximately 12 million car loans — just over 40% of all car finance agreements made during the relevant period.

Why it matters

This is one of the largest consumer redress programmes in UK financial history. The total cost, including administration, is estimated at up to £9.1 billion. Major lenders — including some of the UK's biggest banks and specialist motor finance firms — have already set aside billions of pounds in anticipation of payouts.

However, the scheme is not without complications. Three lenders — Volkswagen Financial Services, Mercedes-Benz Financial Services, and Credit Agricole Auto Finance — have launched legal challenges against the FCA's plans. A consumer group, Consumer Voice, has also applied to the Upper Tribunal to review how the scheme was designed, arguing it leaves too many people short-changed. The FCA has said it will defend the scheme as lawful.

These challenges could delay payments beyond the current expected timeline. The FCA has said it will defend the scheme robustly.

Who is affected

You may be eligible for compensation if:

• You took out a car finance agreement (loan or hire purchase) between April 2007 and November 2024
• Your agreement involved a discretionary commission arrangement, an unusually high dealer commission, or you were not given accurate information about your finance options
• Your loan was with a lender covered by the FCA's scheme

Complaints have already been submitted for around four million finance agreements. Those customers do not need to take any immediate action — lenders will contact them once the scheme's implementation period begins.

For agreements made after 2014, lenders are expected to contact affected customers by the end of 2025. For older agreements (pre-2014), contact is expected by the end of February 2027. If your lender cannot trace you — for example because your address or contact details have changed — you can make a claim yourself until the end of August 2027.

What to do next

If you have already complained, you do not need to do anything further right now. Your lender will contact you once the scheme is operational. Complaining before the scheme is fully up and running is likely to mean you receive compensation faster.

If you have not yet complained, the FCA advises contacting your car loan provider directly. You do not need a solicitor or a claims management company. FCA chief executive Nikhil Rathi has noted that many law firms are seeking around 30% of any compensation — the regulator's own scheme is free to use.

Watch out for scammers. Fraudsters have been posing as car finance lenders and offering fake compensation. Always contact your lender using contact details from their official website, not from unsolicited calls, texts, or emails.

If you used a claims management company, regulators have warned these firms not to charge excessive termination fees and to ensure consumers do not have multiple representatives for the same claim.

The FCA has published guidance on how to complain on its website.

Key steps at a glance:

• Check whether you had a car finance agreement between April 2007 and November 2024
• If you have already complained, wait for your lender to contact you
• If you have not complained, contact your lender directly — not a third-party firm
• Keep your contact details up to date with your lender so they can reach you
• If you do not hear from your lender, you have until August 2027 to make a direct claim
• Be alert to scammers offering compensation via unsolicited contact

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Sources

• BBC News: How will car finance compensation payments work?
• FCA: Motor finance complaints guidance