The Car Finance Scandal Explained: Could It Affect You?

Millions of us have bought a car on finance, spreading the cost over a few years instead of paying upfront. So it is no surprise that the car finance scandal has people checking old paperwork and asking whether they paid more than they should have. Here is a straightforward guide to what happened and how to tell whether it might touch you.

What is the car finance scandal?

It centres on how some lenders and dealerships set up finance deals in the past. Dealers often earned commission from the lender for arranging a customer’s finance. The trouble was that some commission systems let the dealer push the interest rate up, and the higher the rate, the bigger the commission.

Many customers were never told. That means some people may have paid more interest than necessary without knowing why. Concerns about fairness and openness led to investigations by financial regulators and to legal claims from consumers.

Most of us walk into a showroom trusting the dealer to find a decent deal. In some cases the finance on offer was shaped by commission rather than by finding the lowest possible rate. A typical sequence looked like this:

• A customer applies for car finance
• The lender approves a low interest rate
• The dealer raises the rate
• The customer pays more over the life of the agreement
• The dealer earns extra commission

Because the commission arrangement was not clearly explained, the customer usually had no idea.

Who could be affected?

You might be caught up in this if you:

• Bought a car using finance
• Signed a Personal Contract Purchase (PCP) agreement
• Used Hire Purchase (HP) finance
• Arranged the finance through a dealership
• Took out the finance before the commission rules changed

With PCP, monthly payments are usually lower and there is a final balloon payment if you want to keep the car. With HP, you own the car once all the scheduled payments are made. Either type may have involved commission, depending on when it was signed. Not every agreement was unfair, but plenty from previous years are now being reviewed.

Signs it is worth a closer look

• Nobody told you the dealer received commission from the lender
• Your interest rate was much higher than you expected
• You accepted the dealer’s recommended package without comparing other options
• You still have your paperwork, which makes any review easier

What to do next

Don’t panic. Start by pulling together the following, even if you no longer own the car:

• Your finance agreement
• Payment records
• Vehicle purchase documents
• Lender details
• Dealer information

Finance agreements are full of legal and financial terms, so you may prefer to have a qualified professional look through yours rather than puzzling it out alone. A good adviser can explain whether commission may have affected your loan and whether anything important was held back from you.

Will everyone get compensation?

No. Every agreement is different, and whether a claim is valid depends on the detail of your contract and how the finance was arranged. Some deals followed every rule, others may not have. Time limits can apply to legal claims, so if you suspect you were treated unfairly, it is usually wise not to leave it too long.

The main thing is to know where you stand. A little time spent finding your documents could give you the answers you need.