How the FCA's 3% interest rule could boost your mis-sold car finance payout

Your mis-sold car finance payout is not just the money you were overcharged. It may also include compensatory interest. Under the FCA’s motor finance redress scheme, that interest is calculated using the annual average Bank of England base rate for each year plus 1%, with a minimum of 3% in any year.

That floor is worth understanding. For long stretches of the last 2 decades, the base rate sat far below today’s levels. During 2020 and 2021, for example, it fell as low as 0.1%. Without the 3% minimum, base rate plus 1% would have produced much lower interest for those years.

One important update comes first. The FCA scheme was confirmed in March 2026, but parts of it were suspended in July 2026 while legal challenges are heard. That means lenders do not currently have to calculate or pay redress under the suspended parts of the scheme. Even so, the interest rule remains an important part of understanding what your compensation could look like if the scheme proceeds.

What the 3% floor actually changes

The FCA included the 3% floor in the final scheme in March 2026. The aim is to recognise that consumers were deprived of money over time, while avoiding very low interest calculations during the years when the Bank of England base rate was close to zero.

For most people, compensation will be worked out using the average of 2 figures: the commission paid and the estimated loss based on the interest rate they paid. Interest is then added. In the most serious cases, compensation may be based on the full commission paid, plus interest.

The FCA estimates average redress at around £829 per eligible agreement, but your own figure depends on the deal, the commission arrangement, the dates, the amount borrowed and any cap that applies. It is worth reading what your compensation could actually look like rather than fixing on the average.

PointWhat it meansInterest formulaAnnual average Bank of England base rate plus 1%Minimum interest3% in any yearInterest typeSimple interest, not compound interestAverage estimated redressAround £829 per eligible agreementScheme statusPartly suspended while legal challenges are heardFree complaint routeYou can complain directly to your lender

A simple example

Say the underlying redress on your agreement is £2,000 and the relevant period runs for about 10 years. At a 3% simple interest floor, that could add around £600 in interest before any cap or adjustment. Under a lower base-plus-1% calculation during very low-rate years, the interest could have been much less.

These figures are illustrative, not a promise. They simply show why the 3% floor is not a footnote. It can make a meaningful difference, especially on older agreements.

That is also why older car finance deals often matter. The further back the overpayment, the more years of interest may build up. If you took out hire purchase and were charged a higher rate than you needed, or your PCP was mis-sold in a way you are only now spotting, the interest element can become a useful part of the total. The same applies where a PCP is built around a large final payment, making the real cost harder to understand.

It can still apply if the agreement is finished

A common myth is that a settled or part-exchanged agreement rules you out. It does not. You may still be able to claim even after settling the finance, provided the agreement falls within scope and the lender or broker acted unfairly. Making a complaint does not, by itself, harm your credit file.

You may have a stronger case if you were not told about commission, were put on a higher rate because of a commission arrangement, or signed up after weak affordability checks. A mis-sold car finance refund through Claim First is handled on a no win, no fee basis. You can also complain directly to your lender for free and escalate to the Financial Ombudsman if needed.

Claim First also supports other claims, including claiming a payday loan refund, getting money back after a scam, and housing disrepair cases.

Frequently asked questions

How is interest calculated on car finance compensation?
It is calculated using the annual average Bank of England base rate plus 1%, with a minimum of 3% in any year.

Does the 3% floor make my payout bigger?
Often, yes. It helps most during years when the base rate was very low.

Which agreements gain the most from it?
Older agreements may benefit more because interest can build over more years.

Can I challenge the interest rate I am offered?
You can challenge whether the scheme rules were applied correctly, but the interest formula itself is set by the FCA scheme.

Check what you could be owed

The 3% interest floor means your payout may be larger than the headline redress figure suggests, especially on older agreements. Claim First can review your car finance and work out what you might be owed, interest included, at no upfront cost. Start your claim today.