Recent Changes in Car Finance Laws (2024–2026): What Drivers Need to Know

The world of car finance has seen significant regulatory and legal developments over the past year, many of which will directly affect how consumers borrow for vehicles, challenge unfair deals from the past, and influence affordability and transparency going forward. Whether you’re looking to buy a new car on finance, refinance an existing loan, or simply understand your rights as a consumer, these legal changes matter.

1. Historic Car Finance Mis-Selling & FCA Compensation Scheme

One of the biggest developments in the UK motor finance landscape is the Financial Conduct Authority’s (FCA) actions related to widespread unfair car loan agreements.

• The FCA has identified millions of motor finance deals (between 2007 and 2024) that may have been mis-sold due to poor disclosure of commission arrangements between dealers and lenders.

• As a result, the regulator proposed industry-wide compensation where eligible borrowers could receive payouts averaging around £700 per agreement, with total industry liabilities estimated in the billions.

• Importantly, the FCA’s pause on motor finance complaint handling — initially introduced to manage this surge in complaints — will end on 31 May 2026, meaning consumers can expect firms to begin handling claims again under the updated rules.

  
  

This is akin to the UK’s Payment Protection Insurance (PPI) scandal in scope and impact and is reshaping expectations around consumer rights in car lending.

2. Affordability Rules Easing for Buyers with Car Loans

Another notable regulatory shift came in how lenders calculate affordability for other types of borrowing (e.g. mortgages) when a customer has an existing car loan.

• Recent guidance from the FCA led lenders to adjust their affordability models. This means car finance payments now have less of a downward impact on mortgage borrowing capacity than they did previously.

• For example, a typical monthly car finance commitment now reduces borrowing capacity by much less than under old rules — increasing potential mortgage borrowing by several thousand pounds for average earners.

This change won’t directly affect car loan terms, but it does improve overall household borrowing capacity for many people with existing auto finance.

3. Broader Legal & Financial Law Changes Affecting Auto Buyers

While not strictly narrow “car finance laws,” several broader legal developments impact vehicle financing indirectly:

UK Budget & Tax Updates

• In the Autumn Budget 2025, the UK government introduced tax changes (including pay-per-mile charges for EVs from 2028 and increased thresholds on luxury car supplements).

• Certain benefit-in-kind and employee car ownership tax rules have also seen delays or reforms, affecting how company cars are taxed and how they interact with salary sacrifice and finance structures.

These changes can influence the total cost of ownership and taxation, which in turn affects consumer decisions around car financing.

4. Digital & Market Trends Affecting Regulatory Practices

Many lenders and policymakers are embracing digital technologies that improve transparency and risk assessment in car finance applications:

• Use of AI and advanced risk-scoring tools is increasing — meaning quicker approvals and potentially fairer assessments for some borrowers (though this is still primarily a market trend rather than strict law change).

  
  

Why These Legal Changes Matter

Taken together, these regulatory shifts mean:

✔ Consumers get more protection and redress

You now have clearer paths to claim compensation if you were mis-sold a car finance product.

✔ Lenders must be more transparent

Rules and guidance are tightening around disclosure of commissions and complaint handling.

✔ Your borrowing power may improve

If you have a car loan, it’s less likely to overly limit your ability to borrow for a home.

✔ Tax and ownership costs could change

Tax reforms and budget measures influence how attractive the overall financing package is — especially for electric vehicles.

Frequently Asked Questions (FAQs)

1. What are the latest UK car finance law changes in 2025/2026?

Recent changes include a major compensation scheme by the FCA for unfair motor finance deals, updated affordability rules that improve borrowing capacity, and broader tax and vehicle cost reforms announced in the Autumn Budget 2025.

2. Am I eligible for compensation for a mis-sold car loan?

If you took out a personal car finance agreement between 2007 and 2024 involving undisclosed or unfair commission arrangements, you may be eligible for compensation through the FCA’s proposed redress scheme.

3. When will car finance complaints handling resume in the UK?

The FCA’s temporary pause on complaints — introduced to manage an influx of historical mis-selling cases — ends on 31 May 2026. After this date, firms must resume normal complaint handling procedures.

4. How do car loans affect my mortgage borrowing capacity?

New FCA guidance has led lenders to treat existing car payments more favourably, meaning your car finance may reduce your mortgage borrowing less than before — increasing your potential mortgage amount.

5. Do new car finance laws affect electric vehicle financing?

While there aren’t direct car finance laws specific to EVs, tax changes — like pay-per-mile charges for electric vehicles coming in 2028 — can affect overall cost calculations for EV loans.

6. Will interest rates on car finance change because of these laws?

Interest rates are primarily driven by broader economic conditions and lender pricing strategies. Recent regulatory changes focus more on transparency and compensation than on rate setting.

7. Can lenders use AI in car loan approvals under the new laws?

Yes — lenders are increasingly using AI and data analytics to assess creditworthiness more rapidly, which improves speed and potentially fairness in approvals.

Conclusion: What You Should Do Next

If you have an existing car loan or are considering financing a vehicle:

• Check whether you could be owed compensation for past mis-sold finance.

• Review how your car payments impact other borrowing, especially if planning a mortgage.

• Stay aware of budget and tax updates that could change your total ownership costs.

• Ask lenders about transparency of fees and commission to ensure compliance with the latest guidance.

  
  

Keeping informed about evolving car finance laws will save you money and stress — and may even put cash back in your pocket.