Car finance Make sure you don't pay for compensation

As the watchdog warns over claims firms, Rupert Jones looks at the options if you think you've been a victim of motor loan mis-selling

- Rupert Jones

Advertisements claiming consumers could be entitled to compensation for mis-sold car finance are popping up everywhere. "You could be owed thousands. File your car finance claim today" is a typical call to action.

With only weeks to go, however, until we find out whether there could be payouts for millions of people, there are warnings that signing up with a claims management company (CMC) could be a bad idea.

The payment protection insurance (PPI) debacle led to claims firms pocketing billions of pounds of the compensation paid to victims, and it seems some are keen to cash in on this latest issue.

It has been said the scandal could result in a £44bn bill for lenders, and this week a survey revealed that more than 23 million people believe they could be due compensation for a mis-sold car loan.

However, the main UK regulator, the Financial Conduct Authority (FCA), told Guardian Money: "Consumers should be aware that by signing up now with a CMC or law firm, they may end up paying for a service they do not need and losing up to 30% of any money they may receive."

The amount that can be swallowed up in fees is actually up to 36%, as claims companies can charge VAT on top of a percentage cap applied by the FCA. As we explain later, there is a mechanism that allows some law firms to charge even more.

Here we recap the story so far and run through your options.

How we got here This is all about the alleged large-scale mis-selling of car loans involving the payment of secret commissions to car dealers and - it would appear - millions of car buyers unknowingly paying more for their finance than they should have.

Across the UK, an estimated 80% to 90% of new cars, and an increasing number of used vehicles, are bought with motor finance, by which we typically mean personal contract purchase plans and hire purchase agreements.