Did your car finance deal leave you with unaffordable debt?

Millions of consumers are gearing up to receive car finance compensation, with payments anticipated to commence from mid-2026, or are considering whether to bring a mis-selling claim. However, since the Financial Conduct Authority’s (FCA) proposed redress scheme is intended to address the inadequate disclosure of discretionary commission arrangements (DCAs), high commission arrangements, and contractual ties between lenders and brokers, many consumers may not be aware that they may also have grounds to bring an irresponsible lending claim.

These are distinct issues:

• Mis-selling complaints and the regulator’s proposed redress scheme will focus on what you were or were not told about commission and how that may have influenced your interest rate or the overall cost of credit.
• An unaffordable or irresponsible lending claim would instead focus on whether your lender should have offered you credit at all, or on the terms on which the lender provided it, given your financial circumstances at the time you entered into the agreement.

This distinction is vital, as an irresponsible lending claim may lead to a separate, and potentially more significant, redress award than a commission-focused car finance mis-selling complaint.

What does ‘irresponsible lending’ mean?

In practical terms, your car finance agreement may have been unaffordable if, at the time you took it out (or when you refinanced it by changing vehicles), you could not realistically maintain the payments without falling into financial difficulty or undue hardship.

Whilst hardship is case- and fact-specific, common indicators that your car finance may have been unaffordable include having to:

• rely on your overdraft, credit cards, or other borrowing to meet your repayments and essential living costs;
• miss or fall into arrears on essential bills like your rent or mortgage, utilities, or council tax;
• repeatedly refinance or roll negative equity forward to keep the car;
• fall into arrears or default on your payments, or need to consider a debt management solution shortly after inception; or
• cut back on essentials to meet your obligations under the agreement.

Affordability issues can arise with motor finance for several reasons, particularly where agreements are structured around optimistic assumptions about variables, such as:

• your income;
• how many miles you will drive annually or over the term of the agreement;
• the Guaranteed Minimum Future Value (GMFV) of the vehicle;
• future refinancing; and
• future supply and demand in the used car market.

Why are affordability problems common in motor finance?

Payment structures that disguise the genuine cost of keeping the car

Personal contract purchase (PCP) agreements typically have a relatively low monthly payment in comparison to an equivalent hire purchase (HP) agreement. However, a PCP agreement may expose you to significant future obligations via the balloon payment, mileage or condition charges, and refinancing risk.

Negative equity being rolled into new agreements

If you change your vehicle early in your term, your lender may roll negative equity into your new agreement. Driving away in a new car can create the appearance and feeling of progress, but, in reality, may perpetuate a compounding debt cycle.

Add-ons and ancillary products increase the burden

Add-on products like GAP insurance, which may also have been mis-sold, extended warranties, service plans, or cosmetic and tyre coverage are often financed within your car finance agreement and reflected in your monthly payment. This can significantly increase your monthly outgoings on your car, even if the core vehicle finance was otherwise affordable.

Mismatches between affordability checks and real-world risk

If your lender relied on limited information or solely on your own self-declared position, or did not examine obvious signs of financial stress, then you may have been approved for credit when you should not have been.

We examine some of these issues in greater detail in our analysis of the benefits and drawbacks of PCP finance.

What should your lender have done?

Lenders are expected to lend responsibly, in accordance with the obligations outlined in the FCA’s Consumer Credit sourcebook (CONC). In broad terms, this means they must conduct a proportionate assessment before granting credit, which considers whether repayments are realistically sustainable. What passes as ‘proportionate’ will vary depending on each individual’s circumstances and case. However, a consumer with clear indicators of credit stress should generally trigger more analysis than one with a low-risk profile.

Where a lender did not carry out adequate checks, they may have offered you a car finance agreement based on an incomplete understanding of your affordability. In some cases, you may also have been charged a higher rate because you were assessed as a higher-risk borrower. If your lender did not adequately disclose a commission structure that contributed to a higher interest rate, the pricing impact may have made your agreement unaffordable.

The Financial Ombudsman Service (FOS) outlines its key considerations when investigating complaints of irresponsible lending.

Indications that you may have grounds for an irresponsible lending complaint

One effective way to discover if you may have grounds for an irresponsible lending complaint is to instruct a solicitor to act on your car finance mis-selling claim. In addition to handling your car finance complaint, your solicitor can investigate additional claims, including irresponsible lending, and assess whether add-ons such as GAP insurance were mis-sold. A solicitor may also be able to determine whether you may be eligible for a higher compensatory interest rate on your car finance redress.

However, as the FCA’s proposed redress scheme is intended to allow you to claim car finance mis-selling compensation yourself, at no cost, you may also wish to contact your lender directly regarding irresponsible lending.

You may have grounds to bring an irresponsible lending claim if, when you entered the agreement:

• you were persistently using your overdraft or a high proportion of available credit;
• you had recent missed payments, defaults, or arrangements to pay;
• you had significant existing credit commitments relative to income; or
• your income was variable, insecure, or had recently reduced.

You should also consider what the agreement required you to do. Specifically, lending may have been irresponsible or unaffordable if:

• your repayments were a high proportion of your disposable income;
• negative equity was rolled into a new agreement; or
• you were offered a more extended term primarily to reduce your monthly payment.

Finally, lending may have been irresponsible or unaffordable if, after entering into your car finance agreement:

• you missed payments or fell into arrears within 12 months; or
• you took out further credit shortly after to manage household costs.

No single factor proves an irresponsible lending claim; what matters is the overall picture and whether the lending decision was reasonable given what the lender knew or should reasonably have discovered when determining whether to provide you with credit.

Note that if you do bring an irresponsible lending claim yourself, your lender may seek to address your affordability complaint alongside your commission-related complaint, irrespective of whether or not you participate in the redress scheme. You should seek legal advice if a lender’s redress offer mentions other claims or if you are unsure if accepting motor finance redress will limit your ability to pursue additional claims in the future.

Why instructing a solicitor may help

Irresponsible lending complaints are often complex and can be challenging to evidence because they often turn on:

• what the lender ought reasonably to have known at the time they provided you with credit;
• what checks were appropriate in your circumstances;
• how credit file data and other checks should be interpreted;
• whether rolling up negative equity created a foreseeable and avoidable compounding debt cycle;
• how a complaint is framed so that it can be appropriately assessed by the lender or, subsequently, by the FOS or a court.

Instructing a solicitor can help you not only to identify if you have grounds to bring an irresponsible lending claim but also to help you to navigate any subsequent claim you may bring.

What you should do next

If you have already complained or are considering bringing a car finance mis-selling complaint, it is sensible to ask yourself a further question:

Did your car finance agreement leave you with debt you could not realistically afford, based on your circumstances at the time?

If the answer to that question is yes, and you have not already instructed a solicitor to manage your car finance claim, you should consider taking legal advice or instructing a solicitor now.

Register your car finance claim with Harcus Parker, and let us help you

If you had motor finance between 6 April 2007 and 1 November 2024, you may be eligible to claim compensation for commission-related car finance mis-selling and, in some cases, may also have grounds for an irresponsible lending complaint.

Whilst the regulator’s redress scheme means you may be able to claim compensation yourself, at no cost, instructing a solicitor may enable you to identify additional issues and whether you potentially have grounds for an irresponsible lending claim.

Register your car finance mis-selling claim with Harcus Parker here, and we can assess whether there are any indications of affordability issues alongside any commission-related complaint.