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Car finance scandal could cost banks billions

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March 31, 2025
3 min read

Car finance scandal could cost banks billions

Banks in the UK could be expected to pay billions following a Supreme Court ruling over car finance. The court upheld a judgement that decided controversial car loans are unlawful. The loans incentivised dealers to offer higher interest rates, in exchange for more commission, without sufficiently letting borrowers know.

Which! estimates that millions of drivers could be eligible for compensation if the court sides with borrowers. The government has sought to intervene in the case, following concerns over an economic fallout.

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“Such a substantial sum could limit banks’ ability and willingness to lend and provide credit at a time when the economic outlook remains uncertain,” said AJ Bell investment director Russ Mould. “This may be why the government is seeking to intervene.”

One claimant, Marcus Johnson, is seeing his case heard by the supreme court. He took out a loan in 2017 when he bought a Suzuki Swift for £6,500. The interest paid on the loan, which he was unaware of, would fund a commission of £1,600. The Court of Appeal ruled in October in Johnson’s favour, ordering the lender, South African FirstRand Bank, to refund the commission and interest. This led to panic among the finance sector.

The Supreme Court will now hear his case, along with others, against the lender, and one against a British bank, Close Brothers. If it sides with the borrowers, it would set a precedent for similar cases in car finance, possibly leading to billions in compensation.

“In each of these three linked appeals, the claimants were financially unsophisticated consumers on relatively low incomes,” the Supreme Court said in its case summary. It has rejected government attempts to intervene.

According to Which!, it could cost banks up to £16 billion. Other analysts have put even higher estimates with HSBC estimating that it could be as high as £44 billion.

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