Most people who were mis-sold a PCP or HP car finance agreement have no idea how much they were overcharged. The monthly payments felt normal, the paperwork was signed, and the car drove away. But hidden inside many of those agreements was an inflated interest rate, set not in the customer's interest but in the dealer's, to earn a larger commission.
The FCA's own research found that, on a typical £10,000 agreement over four years, a discretionary commission arrangement added approximately £1,100 in extra charges. Multiply that across multiple agreements, longer terms, or higher loan values, and the real financial impact is considerable. This article breaks down exactly what mis-selling cost UK drivers, how compensation is calculated, and what you could realistically expect to recover.
How Mis-Selling Added to the Cost of Your Car Finance
When you arranged car finance through a dealership, the dealer typically acted as a credit broker, introducing you to a lender. In exchange, the lender paid the dealer a commission. Under discretionary commission arrangements (DCAs), which were widespread until the FCA banned them in January 2021, dealers had the power to set the interest rate on your agreement within a range defined by the lender.
The higher the rate the dealer set, the higher the commission they earned. There was no requirement to tell you this was happening, and no incentive for the dealer to offer you the lowest available rate. The result was that millions of borrowers paid more interest than they needed to, with the excess going to the dealer as commission rather than to the lender as a legitimate lending charge.
For a full explanation of how discretionary commission arrangements worked, see our guide: Understanding Dealer Commission and Mis-Sold PCP Finance.
What the Extra Interest Actually Cost Borrowers
The FCA's motor finance market review, published in 2019, provided some of the clearest evidence of the financial harm caused by DCAs. Its findings make the scale of overcharging concrete.
The Average Overcharge on a Single Agreement
The FCA found that on a representative £10,000 loan over 48 months, a DCA added approximately £1,100 to the total cost of credit compared with what the borrower would have paid at the lender's minimum rate. That figure represents the difference between the rate the dealer chose to set and the lowest rate the lender would have accepted. It is not a theoretical maximum; it is an average.
How Loan Size and Term Affect the Total
The £1,100 figure is based on a specific loan size and term. The actual overcharge on your agreement depends on three variables: the size of the loan, the length of the agreement, and the size of the interest rate uplift the dealer applied. Larger loans and longer terms amplify the impact of even a small rate increase. On a £20,000 agreement over five years, the overcharge could be substantially higher.
Multiple Agreements, Multiple Overcharges
Many drivers took out more than one PCP or HP agreement during the period covered by the FCA's proposed redress scheme, which runs from 6 April 2007 to 1 November 2024. If you financed three cars over that period and each agreement involved a DCA, you could be owed compensation on each one individually. The FCA estimates average redress of around £700 per affected agreement, though individual amounts vary significantly.
To understand whether your agreements fall within the eligible period, read: Are You Eligible for a PCP Refund? Key Criteria Explained.
How Compensation Is Calculated Under the FCA Redress Scheme
The FCA's redress scheme, confirmed through Policy Statement PS26/3, sets out a specific methodology for calculating what affected customers are owed. Understanding this methodology helps you assess whether any offer you receive is fair.
The Difference Between the Rate Charged and the Lender's Minimum Rate
Compensation is calculated by working out the difference between the interest rate actually applied to your agreement and the lowest rate the lender would have offered. This difference is then applied to your loan balance over the full term of the agreement to produce the total excess interest paid. That figure, plus statutory interest of 8% per year from the date of each payment, forms the basis of the redress calculation.
Statutory Interest on Top
The addition of 8% statutory interest per year on each overcharge is significant. On an agreement from 2015, for example, ten or more years of statutory interest would be added to the excess interest paid. This is the same rate applied in Financial Ombudsman Service awards and is designed to reflect the time value of money and compensate you for having been deprived of those funds.
The £700 Average Is Not a Cap
The FCA has referenced an average redress figure of around £700 per agreement. This is a statistical average across all affected agreements, not a limit on what any individual can receive. Borrowers with larger loans, longer terms, or more significant interest rate uplifts may receive considerably more. Conversely, borrowers with smaller or shorter agreements may receive less. Your actual entitlement can only be determined by reviewing the specific terms of your agreement.
For more detail on how the FCA's redress scheme works and what lenders are required to do, see: Understanding the FCA Motor Finance Redress Scheme: What It Means for Your Claim.
The Broader Financial Impact Beyond Interest
The direct financial cost of a mis-sold PCP agreement goes beyond the excess interest figure. There are several related impacts worth considering.
The Opportunity Cost of Overpaying
Every pound paid in inflated interest was a pound that could have been used elsewhere. Over a four or five year agreement, £1,100 in unnecessary charges represents real spending power lost to a hidden arrangement you were not told about. For borrowers who took out consecutive agreements over a decade or more, the cumulative opportunity cost is significant.
The Effect on Your Total Borrowing Cost
Because PCP and HP agreements are structured as fixed monthly payments, an inflated interest rate does not necessarily show up as a visibly higher monthly amount. Instead, it is absorbed into the total cost of credit stated in the agreement, often in a section that most borrowers do not scrutinise closely. This is precisely why so many affected customers had no idea they were being overcharged.
Agreements Already Paid Off Are Still Recoverable
The fact that you have already finished paying off a finance agreement does not prevent you from recovering the overcharge. Compensation claims look back at what was paid over the life of the agreement, not at the current balance. Agreements from as far back as 2007 can still be reviewed and, where a DCA was in place, compensation sought.
If you are unsure whether your old agreements qualify, see: How to Check If You Have a Valid PCP Claim.
What Lenders Are Doing About It
The FCA's redress scheme requires lenders to proactively identify affected customers and make contact. However, the process is not uniform across lenders, and some are further along than others. Some have been granted extended timelines due to ongoing legal proceedings.
Waiting for your lender to contact you is one option, but it carries risks. Lenders are required to assess your case, but their assessment of the compensation amount may not always reflect your full entitlement. Any offer you receive through the scheme should be independently reviewed before you accept it, as acceptance typically closes out the claim.
Using an FCA-authorised claims management company ensures your case is being actively monitored, that the compensation calculation is checked against the FCA's methodology, and that you are not accepting a lower figure than you are entitled to.
To understand the signs that your agreement was mis-sold in the first place, see: The PCP Mis-Selling Red Flags Drivers Should Know.
Frequently Asked Questions
How much could I actually receive from a mis-sold PCP claim?
It depends on the size of your loan, the length of the agreement, and the degree to which the dealer inflated your interest rate. The FCA estimates average redress of around £700 per agreement, based on its representative figure of £1,100 in excess interest less charges already refunded by lenders. Borrowers with larger or longer agreements may receive more. Statutory interest of 8% per year on top can add significantly to older claims.
Does it matter that I have already paid off the finance?
No. Compensation is calculated on what you paid over the life of the agreement, not on any outstanding balance. Paid-off agreements going back to April 2007 are within scope, provided a DCA or undisclosed commission was in place. PCP Missold can retrieve your agreement details even if you no longer have the original paperwork.
Will I have to pay tax on my PCP compensation?
Compensation for mis-sold financial products is generally treated as a return of money you should not have paid rather than as income, which means it is typically not subject to income tax. However, the statutory interest element of any award may be taxable. You should seek independent tax advice if you are concerned about the implications for your specific circumstances.
Can I claim if I voluntarily terminated my PCP agreement early?
Yes, in most cases. Early termination of a PCP agreement does not prevent a mis-selling claim. What matters is whether a DCA or undisclosed commission was in place at the time the agreement was taken out, not how the agreement ended. Each case is assessed individually.
What happens if my lender makes me an offer before I have submitted a claim?
You are under no obligation to accept a lender's first offer. If you receive a compensation offer through the FCA's redress scheme, you should have it independently reviewed before accepting. Once you accept, you generally cannot reopen the claim. PCP Missold can assess whether any offer you receive reflects your full entitlement under the scheme's calculation methodology.
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