Bought A Car On Finance? You Could Be Owed Thousands In Compensation

Personal Contract Purchase (PCP) is a type of loan agreement you take out to ‘purchase’ a vehicle.

These agreements are fixed-term contracts typically lasting between two and five years.

During this period, you make monthly payments based on the car’s depreciation value. The depreciation value is the difference between:

• the price of the car when you buy it, and
• how much the finance company thinks it will be worth when you give it back (known as the Guaranteed Minimum Future Value or GMFV).

Unlike a personal loan, you don’t pay off the full value of the car, and you won’t own the car at the end of the term (unless you pay a large ‘balloon payment’).

Because you’re not paying off the full value of the car, the monthly repayments on a PCP loan will be lower than if you were to take out a loan for the full purchase price.

At the end of the PCP agreement, you have three choices:

• Return the car to the dealership and walk away
• Purchase the car outright by paying the agreed-upon ‘balloon payment’
• Trade in the vehicle for a new one and begin a new PCP agreement

Hire Purchase (HP) is a type of loan agreement you take out to purchase a vehicle.

As the name suggests, you essentially hire the vehicle over the contract period.

You will generally pay an initial deposit, followed by monthly repayments over a fixed-term period between one and five years.

The finance is secured against the car, so you only own it once you’ve paid your final repayment (along with any ‘option to purchase’ or ‘transfer’ fee).

It can be easier for people who don’t have a high credit score to get approved for HP compared to an unsecured personal loan.

In short, PCP and HP was widely mis-sold by dealers who were getting paid commissions from lenders without a customer’s knowledge or consent – on 25 October 2024, the Court of Appeal ruled this was unlawful.

Many lenders also gave dealers the ability to manipulate a buyer’s interest rate – and again, dealers very often did this without a customer’s knowledge or consent.

In March 2019, the UK’s financial watchdog, the Financial Conduct Authority (FCA), published the final findings of its review into the motor finance sector.

They said, ‘Some customers are paying significantly more for their motor finance because of the way lenders choose to remunerate their brokers’.

In this context, when the FCA says ‘brokers’ they are referring to car dealers.

The FCA found that some lenders offered dealers a commission arrangement that allowed the dealer to set interest rates, commonly known as a ‘discretionary commission arrangement’.

These arrangements worked in different ways, but generally, the higher the interest rate a customer was charged, the more commission the lender paid to the dealer.

They said, ‘It is not clear to us why brokers should have such wide discretion to set or adjust interest rates, to earn more commission’.

Compounding the issue, the FCA said it had ‘particular concerns in relation to disclosure of commission’.

The rules state that dealers must disclose to their customers the existence of any commission or other financial arrangement with a lender, which could affect their impartiality.

And if they didn’t, and that information could have influenced the customer’s decision whatsoever, then the sale was unfair.

For example, would you have proceeded knowing you could have been charged 3.9% APR, but the dealer chose to charge you 9.9% APR to earn themselves more commission?

Or perhaps if you’d known the dealer was getting paid hundreds, potentially thousands, of pounds simply for arranging your finance?

We believe that many lenders and dealers have treated their customers unfairly, and those customers should be compensated.

You may be eligible to make a claim if:

• You financed a new or used vehicle using a PCP or HP agreement before 28 January 2021;
• You were charged more than 3.9% APR (though it’s still worth checking even if your rate was lower);
• You believed you were getting the best interest rate available to you at the time; and
• The dealer or salesperson didn’t tell you they would be paid a commission, they had the discretion to adjust your interest rate, or their commission was linked to the rate they quoted you.

If your claim is successful, the amount you are awarded will depend on several factors, including how much you borrowed and how much discretion the dealer used when setting your APR.

For example, if you bought a car on PCP six years ago, and the dealer chose to set your APR at 9.9% (meaning you were paying £324 each month), but the lowest rate the lender was prepared to offer you was 4.9% (which meant you should have been paying £265 each month), then you would have been overcharged by £2,119 over the three years.

We would expect you to be refunded the £2,119, plus 8% statutory interest – taking the total to £2,889.

Our example is based on:

• Car price – £20,000
• Customer deposit – £2,500
• Final payment – £10,000
• Annual mileage – 10,000

The Financial Conduct Authority (FCA) estimates that on a typical motor finance agreement of £10,000, broker discretion could have resulted in customers paying around £1,100 more in interest charges over the four-year term of an agreement.

We’ve found that the average motor finance agreement is almost double that amount, so we expect the average amount overcharged to be higher.

In our experience, most people have a copy of their PCP or HP agreement in their inbox, either from the lender or the dealer; this is usually in the form of a PDF document called a Hire Purchase Agreement (or similar).

Having your finance agreement allows us to progress your potential claim as quickly as possible.

If you can’t find your PCP or HP agreement, you have two options:

• You can contact the lender and ask them to email you a copy of your agreement (you should receive it within a few days), or
• We can request a copy of your agreement from the lender on your behalf (your lender should provide this within four weeks, but it may take longer).

Provided you do not cancel your claim after the 14-day cooling-off period, we will only charge a fee if your claim is successful.

If your claim is successful, our fee is 25% plus VAT (30% in total) of any compensation amount. Our fee is capped at £5,000 plus VAT per claim.

By providing our service on a no win, no fee¹ basis, we expect to recover our costs and earn a profit upon the success of customer claims.

If a customer cancels after the 14-day cooling-off period, we will have incurred costs related to providing our services, and we have no prospect of recovering those costs through our success fee.

Therefore, if you cancel after the 14-day cooling-off period but before your claim has concluded, you will be liable to pay us for the reasonable costs we have incurred in relation to providing our services at the rate of £175 plus VAT per hour.

For more information, please read our Terms and Conditions.

Our team of claim specialists and legal partners have been fighting for the rights of consumers for over a decade.

We have an extensive track record in financial mis-selling claims such as PPI, undisclosed commission (‘Plevin’) claims and mis-sold Packaged Bank Account claims.

We now also specialise in car finance mis-selling claims and are highly familiar with the car finance market.

We believe that it pays to have an experienced team assisting with your claim. However, you do not need to use a legal representative; you can complain directly to your lender and refer your complaint to the Financial Ombudsman Service for free.