How will car loan compensation payments work?

The financial regulator has said millions of people who were mis-sold car finance could be entitled to less compensation than it had previously suggested.

The Financial Conduct Authority (FCA) said the payouts could result from 14 million loans taken out between April 2007 and November 2024 – about 44% of the total number during the period.

An earlier Supreme Court ruling had already reduced the scope of those entitled to compensation when it found in favour of finance companies in two out of the three crucial test cases it considered.

What is the car finance scandal about?

The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

About two million are sold this way each year, with customers paying an initial deposit to secure the vehicle, then a monthly fee with interest.

In 2021, the FCA banned deals where car dealers received commission from lenders, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs) and were often not disclosed.

The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.

Since January 2025 it has been considering whether compensation should be paid to people who entered into these deals after 2007.

Other car buyers were also judged to have signed unfair contracts because the commission paid to the dealer was so high – accounting for at least 35% of the total cost of credit and 10% of the loan.

Some customers were not given accurate information about the best finance deal because of exclusive arrangements with certain lenders.

How much compensation could victims receive, and how can they claim?

Under the latest proposals, the FCA expects average payouts of £700 per mis-sold agreement.

This is lower than its previous estimate, which suggested compensation payments of less than £950 per deal.

It means the total cost of the redress is likely to be at the bottom end of its estimate – about £8.2bn.

The exact amount individual consumers will receive will depend on the degree of harm suffered.

Complaints have already been made in relation to four million finance agreements. Those people do not need to do anything.

The regulator said anyone who has not yet complained should contact their car loan provider directly, rather than using a third-party claims management company. It has published this guidance on how to complain.

Under its plans:

lenders will contact those who have already complained. If they don’t hear back after one month, lenders will assume they should look at the case and pay compensation if appropriate
those who have already complained before the scheme gets up and running are likely to receive compensation faster
those who have not complained will be contacted by their lender within six months of the scheme starting. People will be asked if they want to opt in to the scheme to have their case reviewed. They will have six months to decide
those motor finance borrowers who do not receive a letter – for example because lenders no longer have their details and cannot trace them – will have a year from the scheme starting to make a claim

The FCA wants the compensation scheme to be up and running by early 2026, with quick payouts made after that.

However, for some customers – especially if their contact details have changed – it could be many months before compensation is paid.

Who will pay for the cost of the compensation?

The industry is expected to cover the full costs of any compensation scheme, including any administrative costs.

Lenders – including some of the UK’s biggest banks and specialist motor finance firms – have already set aside more than £2bn for potential payouts.

Lloyds Bank has allocated £1.15bn, and Santander £295m.

Financing companies have also set aside millions, including Close Brothers (£165m), Northridge Finance (£143m) and MotoNovo (through the bank FirstRand, £140m).

However, the director of the body that represents the lending industry said it thought the FCA was “overcompensating”.

“We don’t recognise losses on that scale,” said Adrian Dally from the Finance and Leasing Association, adding that the number of people the regulator said lost out “seems implausibly high”.

Since the announcement, Lloyds and Close Brothers have said they may need to set aside more to cover the cost of compensation.

Which cases did the Supreme Court consider and what did it decide?

The Supreme Court considered three test cases.

These focused on whether the commission payments made by finance companies to dealers – which were not disclosed to customers – amounted to bribery; and whether the car dealers had a duty to act on behalf of their customers, rather than in their own interests.

The Supreme Court ruling in August 2025 found in favour of the finance companies in two of the cases under consideration, which narrowed the scope of people who can claim compensation.

The test case which was upheld was that of Marcus Johnson, who bought his first car – a Suzuki Swift – in 2017.

The test case involved Marcus Johnson, 34, who bought a Suzuki Swift

He was not told that the car dealership was being paid 25% commission, which was added on to the amount that he had to pay back.

“I signed a few documents and then drove away in the car,” he told the BBC.

He said he had no option but to use finance when he bought the car, describing it as “heartbreaking” to find out so much extra money had been taken.

Mr Johnson said he was “pleased for myself” that his case was won, “but not for the hundreds of others” who will miss out. “It’s a win, but it’s a really big bag of salt to go with it.”

In his case, the Supreme Court said the terms of his finance deal were unfair due of the size of the commission payment, and the fact he appeared to have been misled over the relationship between the finance firm and the dealer.