What should I do to check if I am owed compensation?

If you used car finance to buy a vehicle any time in the last 18 years, you could be in line for compensation.

It follows a recent court ruling on hidden commissions that lenders paid to dealers, which opens the door for potential payouts to millions, if they are found to have been mis-sold finance.

If you are eligible, you are still in for a bit of a wait, and for now the advice is not to sign up with a claims company promising to help you get redress, because it won’t speed things up and they will charge a fee.

But there are a few other things to bear in mind, if you are trying to work out whether you are likely to get compensation.

Most car buyers use motor finance, borrowing money and paying in instalments over time.

Car dealers almost always receive a payment for their part in arranging the loan – a commission.

A Supreme Court ruled that many of these commission payments were legal, but in certain circumstances the failure by dealers to properly disclose details of the charges could be unfair and therefore unlawful.

The ruling narrowed the scope of redress set by lower courts, which would have allowed claims for compensation from many more car buyers.

The key is whether customers were treated “fairly”, although the regulator, the Financial Conduct Authority (FCA), is still working on exactly what that will mean.

One specific group of buyers who are likely to be eligible are people who took out car loans that included discretionary commission arrangements (DCAs). They were banned in 2021 but prior to that lenders gave car dealers leeway to charge higher interest and earn a percentage of that as commission. Customers who had DCAs and were overcharged as a result are likely to have a claim.

If you still have your contract you can check the terms and conditions.

The Supreme Court ruled in a test case that one car buyer, Marcus Johnson, should be entitled to compensation, setting a reference point for future cases.

Mr Johnson told the court he was presented with “an enormous amount of paperwork”. He didn’t read it all and signed, trusting the sales representative to talk him through the deal.

But 55% of the interest he was paying on the car was commission, which the judge deemed unreasonable.

Anyone paying commission at that level is likely to be eligible for compensation, but it remains to seen how much lower rates would have to be, to count as fair, ruling a customer out of the right to compensation.

The judge also referred to Mr Johnson’s lack of “sophistication” when it came to financial matters. He was a young driver, with little experience.

Most of us feel a bit bamboozled by a car showroom, with the hard-sell tactics and unfamiliar jargon, points out Danni Hewson, head of financial analysis at AJ Bell.

“It feels incredibly pressured,” she says. And most people don’t fully understand the deal they are signing up to, which often include “balloon payments”, backloading the payment at the end of the contract.

“For a lot of people it will feel unfair,” she says. But just because you would like to claw back some of the money you’ve paid, doesn’t mean you will get anything.

Part of the debate around whether car buyers should be compensated revolves around whether customers had given “informed consent” for commission payments.

The details of any financial arrangement including commission must be included in the terms and conditions. But many people do not read the T&Cs, especially if there is time pressure, and someone is dangling a set of brand new car keys in front of them.

Mr Johnson admitted he hadn’t.

But the Supreme Court ruled that the key elements of the contract were not given enough prominence.

So even if all the details – including commission arrangements – were there in your contract, if they weren’t highlighted in a separate box or in bold, you might be eligible for compensation, says Alex Neill, co-founder of charity Consumer Voice.

The FCA is setting up a compensation scheme. In October it will launch a six week consultation over how it should work, with the first payments expected to come in 2026.

So you can just wait until the scheme is available.

Alternatively, the FCA suggests writing to your lender to establish the facts of your own case.

Lenders must acknowledge your complaint within eight weeks, and by submitting a complaint at this stage you may get an indication of how likely you are to receive any redress, says Ms Neill.

If you cannot remember the name of the lender involved the car dealership should be able to help you, she says.

Consumer groups and the FCA advise against signing up with a claims company. Many are advertising their services online, but they cannot proceed with a claim until the FCA scheme has been set up and if they do manage your case they will take a cut of any compensation.

It is not clear yet how much individual customers will be entitled to as compensation, although it is likely to be related to how much they were charged.

It will depend on the individual deal, including the type of car purchased.

Most claims are likely to be under £950, according to the FCA, including around 3% in annual interest.

Of course anyone who has taken out several car finance deals in the last couple of decades could be entitled to more than one pay-out.