Cars on finance can be a difficult problem if you are thinking of an IVA or already in one. And with more than a million cars a year in the UK being bought on finance, this is an increasingly common situation.
It can make a big difference if you are leasing a new Range Rover or if you have a 5 year old small hatchback on HP!
You will need to talk to your IVA firm about your particular situation. But knowing a bit about what what your options could be can help with that conversation.
The types of car finance
I am using the following terms:
- HP for traditional Hire Purchase, where you own the car at the end of the term;
- PCP for the type of Hire Purchase where you have to pay a large balloon payment at the end to own the car, or hand it back;
- Leasing for a contract where you are just renting the car, not buying it and it is returned at the end;
- Personal loan if you borrowed the money from a bank and used that to a buy a car.
A personal loan – the easy case
A car that you bought with a personal loan is the easiest case because that loan is not secured on the car.
If you start an IVA, the bank loan will be one of the debts included in your IVA, so you won’t need to carry on paying this loan in your IVA.
You already own the car so it will be one of your assets when you look at setting up an IVA. If it’s worth a lot, the IVA firm may suggest you should sell it, buy a cheaper one and pay in the difference to your IVA.
HP, PCP and leasing – two issues at the start of an IVA
For HP, PCP and leasing, you don’t own the car. The credit involved in these contracts is not included in your IVA, and if you want to keep the car you have to carry on making the monthly repayments.
All these types of leasing have two issues when an IVA is being looked at.
Are you paying too much each month?
Your creditors will want you to be able to get to work. But if your monthly car finance costs are very high, your IVA firm may think you have cheaper options, eg using public transport.
The car finance company may end your contract
If you look at your car finance documentation, there may be a clause which says the finance provider can end the contract if you go bankrupt or start an IVA.
Why they should want to do this is a bit baffling if you are carrying on making the correct payments. Some lenders are happy for you to continue, despite the fact they could legally cancel the contract.
But some lenders will end the contract and want the car returned. And some of them only wake up to the fact you have an IVA when you are several months in, so it’s possible you will get a surprise letter when you thought everything was going well.
So before you decide on an IVA, ask your IVA firm if they know what your particular lender is likely to do. You could also ask on iva.co.uk for other people’s experiences with your lender.
If your car finance may be ended, discuss what you will do if that happens. For example you could take an IVA payment break for a few months and save up enough to get a cheap second hand car.
What happens when your HP contract ends during an IVA?
At the end of your HP contract you now own the car. If the car is worth a lot, your IVA firm may say that you need to sell it and buy a cheaper one, paying in the difference to your IVA for your creditors.
You no longer have any monthly payments to make, so your IVA monthly payments then normally increase.
What happens when a PCP or lease contract ends during an IVA?
At the end of your PCP contract, your options are very limited because the IVA has wrecked your credit record.
- In theory you could refinance the car with the current lender – but this is almost always refused.
- You could pay the balloon payment and keep the car. This is normally only possible if there is a relative who could do this for you as you would fnd it difficult or impossible to borrow the money yourself. Your IVA firm may agree to you repaying the relative, using the money you had been paying to the car finance company, but it would be good to get this agreed before your IVA starts.
- You could get another car on finance from a lender such as Moneybarn that specialises in bad credit. See Moneybarn’s page on car finance and IVAs. This can be very expensive, with interest rates of well over 30%.
- You could take a payment break for some months before your PCP contact ends to save up for a cheap second hand car.
When a lease contract ends, you have even fewer options – basically just options 3 and 4.
It’s best to talk about these options with your IVA firm before your IVA starts so that you have a plan for what to do.
If your IVA firm says you will be able to get another car on finance so long as it doesn’t cost more than your current one, ask what will happen if no one will offer you any credit at that point… Because it won’t be easy at all.
What happens if you can’t afford your IVA?
Do you want to settle your IVA early?
How IVAs work & what may go wrong
Chris Bone says
Hi
That’s an interesting article, thanks.
Just still on the subject of IVA’s but digressing slightly, we have had some interesting chats locally about people being “too equity rich”. So if say a client had £35k debts but £50k house equity and the figures were accurate, would it be fair to discount an IVA on the basis that creditors are unlikely to vote acceptance as the property could be sold and debts fully repaid, so why should creditors take a dividend on the debt?
Chris
Sara (Debt Camel) says
I get the impression that “too much equity” used to be very common but isn’t now. It may well come down to who the creditors are. And also of course how much the IVA is repaying.
The other problem is what happens if an IVA is agreed using the current Protocol and when it comes to equity release the debtor is made to take long term secured loan at an unpleasant rate of interest, eg 19%. Even if an IVA would be approved, it may well be better to sell the house and settle the debts rather than struggle through 5 years and then end up with that!