Is mis-selling car finance really as bad as the PPI scandal?

mis-selling car finance

There have been rumours for a long time that car finance was the new payment protection insurance (PPI). Mis-selling, it was said, was rife around borrowing to buy used cars. To get to the bottom of this, we’ve spoken to a whistleblower from a finance company.

How was car finance mis-sold?

Prior to 2021, it was entirely legal for those 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 from the person actually lending the money.

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 than PPI. 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 this month (June 2023) alone whose cases are worthy of solicitors pursuing, 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.

mis-selling car finance
Getting a new car can be fraught with danger

The vulnerable were most at risk

The companies that were charging the most for loans were those invariably targeting car buyers who were the most desperate. That is those with poor credit ratings.

These people were paying APRs of up to 40%. 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%.

A process called auto acceptance targeted buyers least able to pay off loans. 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.”

The result was people being encouraged into loans that they would struggle to pay off.

What do you do if you think you’ve been mis-sold?

We explain more about this in this blog post. Broadly speaking, there are two ways to approach this. You either do the legwork yourself, or you get a claims management company to do it for you. The latter is undoubtedly the easier of the two but CMCs come at a cost.

We spoke to one mis-selling victim who received £5,000 in compensation but gave £2,200 away to the CMC.

That said, going to a CMC will save you a lot of effort. Do it yourself and first of all, you’ll have to approach the company you think overcharged you. If you don’t get anywhere with it, go to the Financial Ombudsman Service (FOS).

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