There have been rumours for a long time that car finance was the new payment protection insurance (PPI), with mis-selling rife around finance for used cars. To get to the bottom of this, we’ve spoken to a whistleblower from a finance company. More importantly, we look at what you can do if you were mis-sold car finance.
How you can claim for mis-sold car finance
There are two ways of going about it. You can either use a claims management company (CMC) to do it for you or tackle it yourself.
If you choose the latter, you need to set out your case and approach the broker who sold you the finance. If you don’t get any joy there, they refuse to take it any further and you still think you’ve got a case, go to the Financial Ombudsman Service (FOS). Its website will help you to make a claim.
But the FOS says 90% of claims from people who think they’ve been mis-sold car finance are actually from third parties – that’s to say claims management companies (CMC).
How much of the payout does a CMC take?
CMCs are there to make money so they charge for their services. But the amount is capped. According to experts, most payouts are around £2,000. For awards between £1,500 and £9,999, the amount you pay in fees is capped at 28% or £2,500.
If you were paying a higher APR, you’d get the difference between those payments and the lower APR you should have been offered. And you’ll get the commission the dealer was paid. So if you are awarded £2,000 you’d actually get £1,440 after the CMC’s fees.
Some car dealers were selling cars without declaring commission on finance. Not suggesting Renault was one of them; we just liked the pic
How could you be mis-sold car finance?
The Financial Conduct Authority carried out mystery shopping exercises and found that many car dealers were hiding the amount of commission they were being paid for selling finance products. And if they did disclose commission, it was too later for the customer to do anything about it.
Prior to 2021, it was entirely legal for people arranging the finance ‑ brokers who were sometimes car dealers ‑ to encourage buyers to pay higher costs. This is because the APR (Annual Percentage Rate) was linked to the amount of commission the finance broker got.
Salespeople incentivised to give high APRs
Our whistleblower told us: “It was in your interest to put the customer on a higher APR. To be awarded the monthly commission, you’d have to do a minimum of eight deals with an average APR of 22.5%. You could earn around £1,500 a month extra from this.
“The APR is something we would mention but wouldn’t emphasise. It was a case of ‘you’ve been approved, this is the APR, sign here.’ They’d then put a squiggle on the form without reading through and that was it: they were tied in.”
In the case of the mis-selling victim we spoke to, it meant he paid twice the amount of the original £5,000 loan over a four-and-a-half-year period.
Was this on the scale of PPI?
According to the people we’ve spoken to, it could be worse. Claim Experts is a claims management company (CMC) dealing with customers who believe they were mis-sold car finance.
It says it has helped 20,000 claimants whose cases are worthy of going to solicitors this month alone (June 2023), and the number is growing. “We believe this could be bigger than PPI mis-selling,” Claim Experts director Ben Snape told us.
The Financial Ombudsman Service also says the number of claims it’s dealing with are up, by 85% on the previous year.
The vulnerable were most at risk of mis-selling
The companies that were charging the most for loans were those invariably targeting car buyers who were the most desperate: those with poor credit ratings.
These people, frequently those least able to afford it, were paying APRs of up to 40%, although more usually the APR was in the mid-20%s. That is still very high. Buy a new car and the APR manufacturers charge will be about 6%.
How people were mis-sold car finance
Buyers least able to pay off loans were targeted by a process called auto acceptance. Our whistleblower said: “An applicant would fill out an online form. The system would automatically approve them and verify income by going off average earnings in a postcode, factoring in average mortgage and rent prices in that area.
“It would then generate an APR. At no point would we ever check the customer’s employment status. Some of those could be students, on disability or other benefits and we’d still go ahead. Back then it would just have been pushed through.
“When you get a customer who’s sceptical of their own credit worthiness – that’s why they’re coming to a sub-prime lender ‑ and you’re telling them they’ve been approved, they’re thinking they must go ahead immediately or they might not get their car.”
Remember when your inbox was clogged up with companies asking if you’d been mis-sold PPI? They usually claimed you might be owed thousands of pounds. Experts estimate that the mis-selling of car finance could eclipse that.
One claims management company we’ve spoken too is dealing with more than 20,000 potentially successful claims per month (May 2022).
I’ve been writing about cars and motoring for more than 25 years. My career started on a long-departed classic car weekly magazine called AutoClassic. I’ve since pitched up at Autosport, Auto Express, the News of the World, Sunday Times and most recently the Daily Telegraph. When I’m not writing about cars and motoring, I’m probably doing some kind of sport or working in my garden.
