When buying a car, drivers face a long list of factors that influence both their satisfaction with the purchase and how well the vehicle fits their financial, family, and professional needs. Yet one point that’s frequently overlooked when arranging car finance is the interest rate.
It may seem like a small detail, but it’s the rate that dictates the true cost of borrowing. Understanding what counts as fair helps you avoid paying more than necessary.
Why Interest Rates Matter
Most people buying through Hire Purchase or PCP look first at the monthly payment. It’s an easy anchor, and dealers know it. But the APR is what shapes the full amount you’ll repay. A loan at 8 percent and one at 13 percent can feel similar month to month, yet the difference over four years can run into hundreds of pounds. This is why lenders are expected to set rates responsibly and explain them properly.
The industry has also changed significantly over the last few years. The ban on discretionary commission arrangements means dealers can no longer increase your interest rate to boost their own earnings. For agreements taken out before January 2021, however, many drivers are still discovering that their APR was inflated without their knowledge.
Average APRs in the UK Right Now
Car finance rates shift with the Bank of England base APR, the lender’s own risk appetite, and your credit profile. As of 2025–2026, most drivers will see offers within these ranges:
- 6% to 9% APR if you have good credit and a stable financial history
• 10% to 19% APR if your credit is average or you’ve had minor issues in the past
• 20% or more if your credit is poor or the loan is considered high-risk
PCP can sometimes sit slightly lower at the upper end of the range because the balloon payment reduces the lender’s exposure. HP, which spreads the entire cost across the term, often lands higher if your credit isn’t spotless.
Any quote miles outside these typical brackets should make you stop and question it. A high APR is not automatically unfair, but it must be justified.
How Rates Were Inflated in the Past
Before the regulatory changes, many dealerships operated under discretionary commission arrangements. These schemes gave sales staff the freedom to increase the APR and keep part of the uplift as their income. It created a clear conflict of interest and is the reason so many older agreements appear disproportionately expensive. Although the practice has been banned since 2021, millions of contracts signed between 2007 and 2020 may still contain unfairly increased rates.
Signs Your Rate May Not Have Been Fair
Drivers often only realise something was wrong when they look back and compare their agreement with the market at the time. A rate that sat noticeably higher than those offered by banks is one of the most common indicators. Another is being placed in a high-risk bracket despite having a clean credit record. Many affected drivers also recall being rushed through the process, shown only the monthly payment, or given incomplete information about how interest was calculated. Vague paperwork, missing breakdowns, and evasive answers during the sale are all red flags as well.
What To Do if You Think You Overpaid
The FCA’s proposed motor-finance redress scheme is designed to compensate drivers who entered into regulated car finance agreements between 6 April 2007 and 1 November 2024 where commission was paid by the lender to a broker or dealership. This includes PCP, Hire Purchase and conditional-sale agreements, but excludes pure hire contracts.
Agreements where no commission was involved, or where redress has already been provided through another route, sit outside the scope.
The FCA has also flagged high-fee models, where commission amounted to at least thirty-five per cent of the total cost of credit and at least ten per cent of the amount financed, as a potential indicator of unfairness. Another concern relates to tied or exclusive arrangements between lenders and brokers, which may have limited consumer choice and created incentives that were not disclosed.
The FCA launched a detailed consultation with the aim of finalising rules in early 2026. Under the proposed process, lenders would need to identify all agreements that fall within scope, gather historical records, and assess whether each case created an unfair relationship that caused customers to pay more than they should have. If unfairness is established, firms would then calculate compensation and issue provisional and final decisions to customers within set timeframes.
Compensation would not be calculated using a single figure for all cases. In extreme situations, such as those closely aligned with court precedents, redress may include the full commission paid along with interest. For the majority of agreements, however, the FCA is proposing a formula based on an average overpayment, with interest added at the Bank of England base rate plus one percentage point.
Early estimates suggest that the average redress could be around 700 pounds per agreement, although this varies depending on the original brokerage structure and the level of detriment. Industry analyses indicate that roughly 14.2 million agreements could fall within scope.
If you believe you overpaid, the first step is to check whether your agreement falls within the qualifying dates and whether a broker or dealer received commission as part of the sale. The easiest way to do this is by using an online eligibility checker, which can quickly confirm whether your agreement is likely to fall within the scope of the FCA’s proposed scheme and whether further action may be worthwhile.
Advice for Today’s Car Buyers
For anyone arranging finance now, comparison is the simplest form of protection. Do not rely solely on a dealership’s offer. Check at least two alternatives from banks or online lenders so you know what a realistic rate looks like. A fair APR will feel consistent with your credit profile, sit near the average for the market, and come with a clear explanation. If a dealer can’t justify the figure, the safest option is to walk away.
