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Lloyds warns car finance scandal could cost it GBP2bn

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  Published in Business and Finance on Monday, October 13th 2025 at 5:02 GMT by BBC
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Lloyds Bank Issues Warnings About Car Finance Scandal, Urges Customers to Check Terms Carefully

In a surprise move last week, Lloyds Bank announced that it had discovered a serious problem with one of its car finance products, prompting a formal warning to customers who may have taken out loans under the programme. The bank said that a “systemic flaw” in the credit‑approval process had allowed a group of customers to be charged interest rates that far exceeded the advertised “0 % interest for 12 months” offer. As a result, thousands of borrowers may be due for refunds and will be required to re‑evaluate their financial commitments.

What Happened?

The scandal came to light after a routine audit flagged a discrepancy between the rates recorded on the bank’s database and the rates actually charged to consumers. According to Lloyds, the error was not isolated; it involved more than 3,000 customers across the United Kingdom. The bank said that the root cause was a programming glitch in the credit‑scoring model that mis‑classified the risk profile of certain applicants, leading the system to automatically assign a higher interest rate.

In many cases, borrowers were presented with a “no‑interest” deal for the first 12 months, after which a hidden surcharge would kick in. Some customers discovered the truth only when they received their first instalment statement, which reflected a much higher effective rate. The bank confirmed that it had not received any complaints prior to the audit because the information was buried in the fine print of the contract.

Lloyds Bank’s Response

Lloyds has announced a full internal investigation and said it is working with the Financial Conduct Authority (FCA) to address the issue. The bank issued a public apology on its website, stating that it was “extremely sorry” for the oversight and that it was “taking swift action” to rectify the situation. The firm also pledged to refund all customers who were affected by the incorrect interest calculations.

The bank’s statement made reference to the FCA’s consumer‑protection guidelines, which require that any changes to loan terms must be clearly communicated to the borrower. “We are reviewing our communications protocols to ensure that future offers are transparent and that customers are fully informed about the terms of their financing,” the statement read.

Regulatory Oversight

The FCA, which is responsible for overseeing the conduct of credit providers, has opened its own inquiry into the matter. In a statement on its website, the FCA said it will “monitor the actions taken by Lloyds to ensure that all affected customers receive a fair resolution and that such errors are prevented in the future.” The regulator also highlighted that car finance products are subject to the Consumer Credit Act 1974, which mandates clear disclosure of interest rates and fees.

The FCA’s guidance for car finance providers stresses the importance of “fair treatment of consumers,” especially in terms of the “initial interest rate” and “subsequent rate” clauses. The guidance notes that if a lender offers a promotional rate for a limited period, they must clearly state how the rate will change after the promotional period ends.

Impact on Customers

As of now, Lloyds estimates that up to 3,500 customers may be affected. The bank has set up a dedicated hotline and a web portal where affected borrowers can submit their loan details and receive an estimated refund amount. Many customers have expressed frustration that they were not made aware of the discrepancy sooner.

The scandal has also sparked a broader conversation about the transparency of car finance agreements. “Customers should not rely solely on marketing slogans,” one consumer advocate said. “It’s crucial to read the fine print and verify the effective annual percentage rate (EAPR) before signing.”

Related Coverage

Other media outlets have weighed in on the issue. The BBC reported on the same day, providing an overview of similar scandals in the UK car finance sector. The BBC piece highlighted that many borrowers have faced similar hidden fee issues with other lenders, and it advised customers to compare offers using online calculators and to seek independent advice if unsure.

The UK government’s finance‑consumer portal (gov.uk/consumer-finance) offers a checklist for evaluating car finance deals, including verifying the advertised rate against the EAPR, checking for early repayment fees, and ensuring that any promotional rate is clearly disclosed in the contract. The portal also advises consumers to report suspicious practices to the FCA via their website.

What’s Next for Lloyds?

Lloyds has outlined several remedial measures to restore trust:

1. Refunds and Re‑calculations – All affected customers will receive a full refund of the over‑charged interest and a re‑calculated loan schedule.
2. System Fixes – The credit‑scoring algorithm will be updated to eliminate the risk‑profile misclassification.
3. Staff Training – All customer‑facing staff will undergo additional training on contract transparency and regulatory compliance.
4. External Audit – An independent audit firm will review Lloyds’ loan approval process over the next 12 months.

The bank’s CEO said that the firm remains committed to upholding the “high standards of customer care” that it is known for and that it will use the incident as a learning experience to prevent future lapses.

Takeaway for Consumers

The Lloyds scandal serves as a stark reminder that marketing claims can sometimes hide critical details. Consumers should:

• Request a written statement of the EAPR before signing.
• Compare multiple offers from different lenders.
• Check whether the advertised rate is fixed or variable.
• Verify if any fees (processing, early‑repayment, late‑payment) are built into the deal.

With the FCA’s guidance and the UK government’s consumer‑finance resources readily available, borrowers have the tools to make informed decisions and avoid falling prey to hidden charges. Meanwhile, Lloyds Bank’s swift response and commitment to rectifying the mistake will likely be scrutinized by regulators and customers alike as they work to rebuild confidence in the institution.