From rapidly expanding personal debt levels to a looming legal crisis over undisclosed commissions, the UK’s once-stalwart car finance sector has seldom faced so many foundational challenges at once. Over the past decade, as dealerships, banks, and specialised finance houses scrambled to supply the relentless demand for new vehicles, the market’s structure has changed dramatically. Newer financing methods like Personal Contract Purchase (PCP) have become commonplace, replacing outright ownership as the dominant mode of acquisition, yet lurking beneath this boom are warning signs all too reminiscent of previous financial upheavals.

Yet the challenges for this market are just beginning, with an unfolding legal crisis around undisclosed commissions, which for years has distorted lending decisions and inflated consumer costs. Meanwhile, interest rate shifts and a fragile economic outlook threaten an already overextended base of borrowers, with default rates likely to jump if interest rates remain elevated and cost pressures remain. This is especially prominent among lower-income and subprime borrowers, who are increasingly seen as the canary in the coal mine, as a spike in defaults could undermine the residual values that underpin PCP contracts, sending further shockwaves through the industry.

However, in the midst of this precarious situation stands Motability, a powerful entity owned by major banks and operating as a not-for-profit, that manages a fleet of over 800,000 vehicles and logged revenues just under £7 billion in 2024, making it the country’s largest fleet operator. The question now remains whether Motability’s dominance is masking deeper fractures within the car finance market, artificially boosting sales volumes in a sector that otherwise might have shown a more significant contraction, concealing the scale of a broader bubble.

The Hidden Commission Scandal

The UK’s transition from traditional vehicle ownership to credit-fuelled financing has been swift, with the average amount borrowed for a new vehicle surging from around £11,964 to £25,039 between 2009 and 2022, considerably outpacing underlying income growth. An overwhelming proportion of new cars, roughly 90%, are now bought on some form of finance, with PCP agreements accounting for the bulk of those deals. This once obscure purchasing option has grown in popularity by offering consumers lower monthly payments and an optional “balloon payment” at the end of the term. Yet at the heart of this new wave lies a controversial and long-standing practice that has, until recently, remained largely obscured from public view. For over a decade, undisclosed commissions on PCP agreements have quietly shaped the UK’s car finance market.

The issue is rooted in the symbiotic relationship between car dealerships and finance providers, where dealers were frequently incentivised to arrange finance agreements that maximised their own commissions, rather than securing the most competitive interest rates for consumers. Consequently, many customers, often unaware of the mechanics of their financing deal, were paying inflated interest rates, not because of their creditworthiness, but because dealers had a financial incentive to push more expensive loans against the best interests of their own customers. This widespread practice was effectively a margin-padding mechanism that relied upon ambiguity, with consumers not informed about the scale of commissions embedded within their agreements, nor the extent to which these payments influenced the rates they were offered. 

Government Caught in the Crossfire

However, after a landmark Court of Appeal ruling in 2023, which deemed these hidden commissions unlawful, a tidal wave of legal challenges has erupted, with compensation claims already surpassing 60,000 complaints lodged with the Financial Ombudsman Service. But this is only the beginning, there are expectations that this scandal could rival that of the £38 billion paid out for the PPI misselling scandal, with estimates ranging between £30 billion and £44 billion of expected compensation. Consequently, major lenders have begun stockpiling provisions, with Lloyds Banking Group setting aside £450 million, Santander UK £295 million, and Barclays £90 million, but these reserves may fall drastically short if the compensation ruling follows the trajectory of PPI.

Unsurprisingly, the current government is acutely aware of the possible fallout from this emerging scandal, with Chancellor Rachel Reeves attempting to intervene in the Supreme Court process, expressing concerns that massive compensation payouts might destabilise Britain’s car finance infrastructure. Reeves insisted that her goal is primarily to protect working families and prevent the UK’s car finance market from imploding under the weight of potentially gigantic payouts. However, the Supreme Court has thus far blocked the Chancellor’s attempt to formally weigh in, underscoring the judiciary’s independence in the case, potentially forcing major lenders to absorb billions in retrospective compensation. As a consequence, the era of cheap and accessible car finance, fuelled by opaque commission structures, may be drawing to a close, with stricter lending practices, higher finance costs, and reduced dealer incentives forcing a sharp contraction in demand.

A Shifting Macroeconomic Backdrop

To make matters worse for the industry, these legal tremors arrive against a backdrop of restrained economic growth, a persistent cost-of-living crunch, and elevated interest rates. Additionally, the Bank of England has recently downgraded its growth forecast for 2025 from 1.5% to 0.75%, warning that the UK may escape a formal recession by only the narrowest of margins, and with inflation remaining stubbornly above target, hovering around 3%, this complicates the trajectory of further rate cuts. For consumers, even small changes in interest rates can deeply affect the monthly costs of financing a car, and with most car loans in the UK being fixed-rate contracts, borrowers currently locked into lower rates face a potential shock if they attempt to roll over or replace their vehicle in a higher-rate environment. Simultaneously, ballooning petrol prices, expensive servicing, and the broader lifestyle cost pressures have prompted some drivers to question whether they can continue justifying monthly car finance payments.

The £7 Billion Motability Lifeline Fuelling a Crumbling Market

Motability occupies a primary position in this market as the country’s largest fleet operator, yet the organisation’s financial performance has recently been tested, reporting a pre-tax loss of £564.6 million in 2024. This is a stark reversal from the previous year’s profit of £748 million, with surging operating costs and a sharp reduction in gains from vehicle disposals following wild swings in the used-car market. By virtue of its large leasing volumes, Motability is a crucial customer for UK car manufacturers and dealerships, purchasing one in five new cars sold in Britain last year. This has effectively created a built-in level of support for the industry, particularly in times of weaker external consumer demand. For instance, during the pandemic and again amidst the cost-of-living crisis, Motability’s ongoing purchases have contributed a welcome counterbalance to depressed broader demand, along with playing a major role in propping up the used car market.

However, the recent pre-tax losses experienced by the company, underscore Motability’s vulnerability to the same macro factors that plague the broader industry, namely inflation in running costs, volatile used-vehicle valuations, and shifts in interest rates. Consequently, Motability’s growth may have masked deeper fractures in the car market, artificially boosting sales volumes in a sector that otherwise might have shown a more significant contraction. Therefore, despite Motability’s resilience undoubtedly helping to ensure market stability in previous years, as market conditions continue to worsen, it could have concealed the scale of a broader bubble that it can no longer afford to support.

Motability Under Pressure as the Bubble Grows

Admittedly, talk of a car finance bubble has been brewing for years, fuelled by the discrepancy between mounting borrowing and lagging wage growth, as well as the proliferation of finance products enabling near-constant upgrades to newer vehicles. By definition, a bubble involves prices or asset values diverging substantially from underlying fundamentals, and in the case of the car finance market, the ‘asset’ is both the vehicle’s residual value and the reliability of the borrower’s income stream. Should default rates climb amid spiking living costs, demand weaken considerably, or used-car residual values fall sharply, lenders holding billions of pounds’ worth of outstanding contracts could see significant shortfalls. 

These fears have reached new heights as the commission litigation began to wend its way through the courts, with a pro-consumer outcome compelling finance houses to brace for multibillion-pound payouts, resulting in tighter lending conditions and higher interest rates for consumers. Furthermore, after Motability’s significant pre-tax loss last year and sharp decline in gains from vehicle disposals, dropping from £420.4 million in 2023 to just £8.9 million in 2024, these financial pressures may result in Motability being forced to scale back its operations.

At the same time, political scrutiny of Motability’s role in the car market is intensifying, with mounting pressure on government spending and a growing debate over corporate governance in publicly linked institutions. This could potentially lead to the scheme facing further regulatory intervention or budgetary constraints in the near future. The number of eligible recipients for Motability expanded by 14.7% in 2024, raising concerns that the scheme’s qualification thresholds may be too lenient, allowing access to individuals who some argue do not have an essential need for a leased vehicle. This sentiment has fuelled frustration among taxpayers and policymakers, particularly as public finances remain under pressure and demand for other welfare services grows.

The government, already embroiled in the car finance commission scandal, may find itself under pressure to review the level of financial support directed towards Motability, especially given its current reliance on taxpayer-funded disability allowances. Any reduction in support or restrictions on eligibility would weaken a vital backstop that has helped cushion the car industry from economic downturns. Without Motability’s stabilising influence, the UK’s already fragile car market could experience a deeper contraction, accelerating the financial difficulties faced by manufacturers, dealers, and lenders alike.

Key Takeaways

For those watching the UK automotive sector closely, the compounded forces of mounting debt, legal peril over hidden commissions, and an uncertain economic horizon form a compelling if uneasy narrative. Ultimately, whether Motability’s involvement amounts to a prudent buoy or a precarious crutch for a market laden with consumer debt is a question not merely for Britain’s disabled drivers or the banks that finance them, but for the entire UK economy. Questions need to be answered over how resilient Motability truly is in the face of rising costs and falling residual values, and whether its stabilising role is inadvertently encouraging the broader market to cling to unsustainable debt levels. For policymakers, ensuring that Motability continues to serve its social purpose while not distorting market fundamentals presents a delicate balancing act.

In a sector that employs thousands and generates billions in transactions each year, any significant shock has the potential to reverberate well beyond the showrooms and into the broader financial landscape. If the legal and economic headwinds facing the wider car finance market continue to intensify, particularly with the looming threat of multi-billion-pound compensation payouts, the sector could be edging towards a long-overdue reckoning. In a market increasingly reliant on subsidies and opaque lending structures, the question is no longer whether cracks are forming, but how long the foundations can hold.