Car finance mis-selling: The silent drag on the UK’s ‘real economy'

Lenders had mobilised their defences long before the Financial Conduct Authority (FCA) published its car finance redress scheme proposals and disclosed its estimate that 14.2 million motor finance agreements had been mis-sold between 6 April 2007 and 1 November 2024, with 11.4 million of those involving discretionary commission arrangements (DCAs).

Some lenders have argued for years that if they were to pay compensation for car finance mis-selling it would damage the broader economy, claiming that having to pay out what some estimates suggested could amount to a collective £44 billion redress bill would reduce their own capacity to lend, invest, and create jobs. They have also warned that being made to compensate theirs customers would reduce their share prices and, by extension, make the UK as a whole unattractive to business and broadly ‘uninvestable.’

This argument ignores a crucial fact: the real economic damage has already happened.

It also positions the victim as the lender and the UK economy as a fragile entity wholly reliant on banks' balance sheets.

Those very same balance sheets were the big winners when millions of motorists were being overcharged for car finance between 2007 and 2024, which meant that money was extracted from household budgets and transferred to lenders as profits.

In effect, car finance mis-selling has operated as a long-running private ‘tax’ on the UK economy.

The scale of the money taken out of UK households

The FCA’s redress scheme consultation paper (CP25/27) estimates that affected consumers will receive an average of about £700 per mis-sold agreement and suggests that lenders could pay out £8.2 billion in total, given the percentage of consumers expected to participate in the scheme and receive redress.

Those figures are potentially conservative and have been disputed by the All-Party Parliamentary Group (APPG) on Fair Banking, which, in a November 2025 report titled Car Finance Scandal: Assessing Redress, suggested that the actual value of lenders' excess profits from car finance mis-selling is £15.6 billion. This figure was based on the regulator's own 2019 estimate, published in its Motor finance discretionary commission models and consumer credit commission disclosure consultation paper (CP19/28), that the average loss per mis-sold car finance agreement was £1,100, before compensatory interest. On this basis, the FCA's redress scheme allows lenders to retain £7.4 billion of their collective gains from car finance mis-selling.

Even if we work with the regulator’s lower estimate, this still represents a colossal transfer of wealth: billions of pounds in excessive and undisclosed commissions, paid via inflated interest rates over many years by ordinary households, often on tight budgets, which were channelled into the profits and capital positions of lenders and manufacturer-linked finance companies.

This is money that should have been circulating through local high streets and small local businesses and service providers but was instead siphoned off by financial institutions.

Why this matters for the broader economy

Household spending is the UK’s economic engine

Office for National Statistics data shows that household spending accounts for 59% of total spending across the economy.

That means that when millions of people pay more than they should for a fundamental product like car finance, the consequences and impact add up to more than a simple transfer of wealth from consumers to lenders. It suppresses spending elsewhere and means:

• fewer meals out and day trips;
• less spent in local shops;
• cancelled subscriptions and leisure activities; and
• postponed home improvement projects.

Multiple shocks magnified and compounded the impact of car finance mis-selling

It is also worth considering that several additional, significant economic events and shocks created a fragile consumer environment during the period when car finance mis-selling was happening compounded the impact on household spending. For example, the 2008 global financial crisis and subsequent austerity policies, the Brexit vote and subsequent events, the COVID-19 pandemic, the global energy crisis that began in 2021, and the February 2022 Russian invasion of Ukraine all brought significant economic consequences.

An October 2025 Financial Times report also found that UK consumer spending since the pandemic has grown more weakly than in any other G7 country, with household spending up just 1% in real terms but spending per person down 3%.

Debt overhang makes people cut back further and faster

Economic research has also demonstrated that heavily indebted households cut their spending more severely when under pressure. A 2015 Bank of England study exploring household debt and spending post the 2008 financial crisis, Household debt and spending in the United Kingdom (Working Paper No. 554), identified this trend, showing that highly indebted households made significantly larger cuts to consumption and concluding that this ‘debt overhang’ may have reduced private consumption by up to 2% in the years following the crash.

Why is that significant when discussing motor finance?

Car finance is one of the most common forms of credit in the UK: industry data compiled by Statista indicates that around two million new agreements were entered into in the 12 months to May 2025, while the regulator’s estimate that 14.2 million agreements were mis-sold between 6 April 2007 and 1 November 2024 provides its own perspective of the scale of the market.

Vitally, for many UK households, a car is not a luxury. This is particularly true for the approximately 17% of people living in rural areas and the many millions more who live outside of major towns or cities and have less-than-optimal access to public transport infrastructure. It is essential for getting to work, taking children to school, participating in social activities, and basic participation in everyday life. Where a consumer has had the cost of their car finance inflated unfairly, excessively, or both:

• there is limited, and often zero, scope to cut that particular payment without defaulting;
• cuts therefore must fall elsewhere, whether to food, leisure activities, clothing, savings or pension contributions, or even to other essential outgoings like council tax and energy.

Car finance mis-selling effectively forced many families to behave like highly indebted households, making deeper and more painful cuts to other areas than they would otherwise have made.

When car finance payments crowd out other essentials

Since late 2021, the UK has been widely regarded as being in a cost-of-living crisis, which continues to inflict misery on households across the country more than four years later.

• Research released by the Money Advice Trust in March 2025, during Debt Awareness Week, estimated that seven million (13%) of UK adults are behind on at least one household bill.
• In October 2025, Citizens Advice reported that four million people in England and Wales are in ‘negative budgets,’ meaning they do not have enough income to cover essentials, and that the average household debt of those seeking professional advice was approaching £10,000.

While these are recent figures, this situation is not a recent development. It has been brewing for many years, while many motor finance customers have been paying significantly more than they should have, and many households in such a situation may also have been victims of car finance mis-selling.

In cases where they were, their unfairly and artificially inflated monthly motor finance payment may have made the difference between:

• paying or falling behind on council tax, utility bills, rent or mortgage;
• keeping up with payments for other credit commitments or spiralling further into a debt trap;
• being able to contribute a small amount to emergency savings or having no resilience or safety net at all.

Ultimately, every extra and unnecessary pound spent on a car finance payment was a pound that a consumer could not spend on essentials or use for other forms of consumption that stimulate economic activity.

The lost ‘local multiplier’: money that never reached the high street

Numerous studies, including by Visa UK and the New Economics Foundation, have shown that money spent locally within independent businesses ‘multiplies,’ with such businesses more likely, compared to larger corporations, to:

• employ people who live locally;
• engage with other local vendors for both buying and selling products and services; and
• reinvest in local initiatives and donate more to local charitable causes.

Car finance mis-selling has diverted billions of pounds away from household budgets, preventing this local multiplier effect from taking hold.

1. These businesses lost sales because consumers were trading down or postponing or cancelling purchases entirely.
2. They were then forced to cut back on staff hours, the range of products or services they offer, and investment in the local area. In some cases, they may have even been unable to stay open.

There is a distinct difference between capital held by a bank and cash circulating through local economies, as money paid in excessive commissions is effectively removed from circulation. It moves from a high-velocity environment (the consumer's pocket, where it is spent quickly) to a low-velocity environment (the lender's balance sheet), thereby stifling the 'velocity of money'—the speed at which money changes hands—a key driver of economic growth.

Contrast this with what happened to the additional money handed over to the national and multinational lenders who had been overcharging customers for years. Lenders would have deployed those profits primarily at head office level to meet capital requirements, fund shareholder dividends, finance activities and markets outside the UK, or even lend back to consumers, as discussed further below in the discussion of compensatory interest.

Households spend, lenders hoard

Another vital question is who holds the money.

It is well established that lower-wealth and lower-income households have a much higher ‘marginal propensity to consume,’ meaning they are far more likely to spend an extra pound of income than wealthier households or large institutions like lenders, who are more likely to save it. While no studies have been undertaken in this specific space to date, it is highly probable that the nature of car finance mis-selling disproportionately affected lower-income households, particularly those with more limited access to credit and lower interest rates.

This was not abstract economic theory; it was your disposable income being held on a lender's balance sheet rather than in consumers' bank accounts.

This means that when billions of pounds are transferred from ordinary households to financial institutions via artificially inflated car finance costs, and those institutions retain their gains as profit or capital, the result is an inevitable drag on demand.

Additional hidden costs: debt, mental health and productivity

The drain that car finance mis-selling has had on the real economy is not just about lost spending; it has also impacted mental health and even public expenditure.

There are strong and well-documented links between problem debt and mental health difficulties, with the Money Advice Trust’s National Debtline service highlighting that 50% of adults who are struggling with debt also have a mental health issue. Additionally, a 2024 Parliamentary research briefing titled Consumer debt and mental health noted that better integrating debt advice with NHS talking therapies could help tens of thousands of additional people each year and deliver tens of millions of pounds in healthcare and wider economic savings. However, the more pertinent question is what the impact would be of addressing some of the causes of people falling into those debts.

Whilst there is no single data set that isolates mis-sold car finance as a specific or primary cause, it is clear that unfairly high car payments have contributed to problem debt for some households, and that such problem debt has far-reaching consequences for the individual concerned and their family, as well as for broader society. All of these outcomes impose further indirect costs on the real economy through lost productivity, higher levels of sickness absence, and greater demand on already overstretched and struggling health services.

The compensatory interest debate

While lenders argue that the regulator’s proposed redress scheme is punitive, its design, particularly in relation to compensatory interest calculations, illustrates where the balance of advantage lies.

Simplified versus compound interest

The FCA’s proposals are for simple interest to be added to consumers’ car finance compensation at a rate equal to the Bank of England base rate plus 1% per year, with an estimated weighted average rate of about 2.09%. This is far below the traditional 8% simple or compound compensatory interest often applied in civil cases and, crucially, when considering arguments around fairness and the impact on lenders, will save lenders billions in redress payments.

In other words:

• Between 6 April 2007 and 1 November 2024, lenders 'earned' interest and profits on consumers' money that should never have been theirs.
• The regulator's proposed scheme will see lenders compensate consumers at a relatively low interest rate that does not reflect fully what that money could have been worth to those individuals had they been free to use it.

The disparity here is profound. While lenders will repay funds at a rate of roughly 2.09%, they have almost certainly earned a significantly higher returns on that capital over the last decade. The difference between the 2.09% simple interest the regulator proposes, and the compound returns lenders made by investing or lending that money, represents a secondary profit.

The notion that redress is ‘punitive’ is, at best, misplaced, considering many lenders will emerge having retained a substantial share of the economic benefit and profited significantly from the mis-selling, even after paying out billions, albeit in a slightly different way from that highlighted by the APPG on Fair Banking.

Will lenders paying large redress bills really threaten the economy?

Lenders have warned that the cost of putting things right, albeit from a position of not believing they have done anything wrong in the first place, could harm their ability to support the broader economy, as well as:

• damage the UK’s ‘investability’;
• constrain the availability of credit, not just in the car finance space; and
• harm jobs and growth.

However, both the APPG report, which went so far as to accuse lenders of 'doom-mongering,' and other industry commentators have challenged such claims, arguing that it is incorrect to conflate a hit to individual lenders’ profits and share prices with genuine, long-term damage to the real and productive economy.

It is also vital to separate the short-term adjustment from the importance of fairness and long-term growth. It must also be noted that many banks and other car finance lenders have, in fact, been setting aside provisions for car finance redress since early 2024, with many increasing their provisions following August 2025’s Supreme Court judgment in the Johnson, Wrench and Hopcraft test cases and the regulator’s subsequent launch of its redress scheme consultation.

These provisions are not an arbitrary cost imposed on a previously blameless system, but an accounting recognition of liabilities created by past misconduct and wrongdoing.

Given that lenders have demonstrated a willingness to prioritise their own balance sheets over the broader economy, consumers should consider whether they trust these same lenders to calculate their redress payments without independent oversight.

How car finance redress will boost the economy

Compensating customers will inject billions of pounds into household budgets, where much of it is likely to be spent, and will go some way to restoring trust in the financial system and the UK’s financial institutions, which is arguably the most vital component of a healthy and functioning credit market. Unlike a government stimulus package funded by taxation or borrowing, this injection of capital requires no public funds. It is simply the return of money to its rightful owners.

This is far from a negative outcome and is likely to represent a net boost to the real economy. These perspectives highlight that a meaningful redress scheme is not merely a legal obligation or a moral necessity, but a means of reversing some of the long-running drain on the real economy caused by years of motor finance mis-selling.

The direct boost to household spending power

If even half of the £8.2 billion in estimated redress is spent rather than saved, that would still be a meaningful injection into consumption and the UK’s real economy at a time when spending has been weaker than in other G7 economies.

Disproportionate benefits for lower-income households

Because many mis-sold car finance customers are likely to have been on modest or stretched incomes, a significant proportion of redress payments will flow to households with a high propensity to spend, particularly on essentials and local services, where the impact on the real economy is likely to be greatest.

Potential for reduced problem debt and associated social costs

Where consumers use their redress to clear arrears on priority bills or higher-cost debt, that may help to move some households who are currently in ‘negative budgets’ out of those situations and unlock their ability to spend, while also potentially reducing the mental health and productivity burdens associated with problem debt.

Improved trust and better market functioning

Rather than redress payments leading to car finance becoming expensive or limited in availability, a market that is forced to confront and correct mis-selling is more likely to function efficiently in the future, with fairer pricing at all levels of the market and more transparent products. This outcome will support sustainable demand for finance, rather than a model that quietly overcharges customers for many years and, by no reasonable definition, could be considered functional.

What this all means if you had car finance between 6 April 2007 and 1 November 2024

If you had motor finance between 6 April 2007 and 1 November 2024, you may have been affected by DCAs or other excessive or undisclosed commissions, as well as other forms of mis-selling that may have inflated the cost of your regular car finance payment.

Although the regulator’s proposed redress scheme is complex, it is clear that:

• mis-selling has occurred at a significant scale;
• it is not a victimless technicality; and
• the money you and millions of other consumers overpaid had consequences for your household and the broader economy.

The FCA’s redress scheme proposals mean you will be able to bring a car finance claim yourself, at no cost; however, there are several compelling reasons why you may wish to instruct a solicitor to manage your claim. For example, we can ensure your compensation is calculated correctly and investigate other potential claims, such as for mis-sold GAP insurance.

If you are ready to register your car finance claim with Harcus Parker, you can do so here.