Cars on finance can be a big problem with an Individual Voluntary Arrangement (IVA). Sometimes they can cause difficulty getting the IVA approved. Sometimes you face a major problem when the car finance end.
With more than a million cars a year in the UK being bought on finance, this is an increasingly common situation. And one that is being made worse in 2023 by the cost of getting a replacement car, with secondhand car prices being so high.
You will need to talk to your IVA firm about your particular situation. Also it’s best to have this conversation before your IVA starts, so you can be sure you will be all right when the finance ends.
Some IVA firms are too dismissive of this at the start, assuring you you will be able to get new finance when the current one ends. This is not the case… and you should consider talking to a different IVA firm that is more honest with you.
The four ways to finance a car
- HP is traditional Hire Purchase, where you own the car at the end of the term;
- PCP is a 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 is a contract where you are renting the car, not buying it. It is returned at the end;
- Personal loan is where you borrowed from a bank and used that to buy a car.
A personal loan – the easy case
A personal loan is the easiest case because that loan is not secured on the car.
In an IVA, the bank loan will be one of the debts included, so you won’t need to carry on paying this and the bank cannot repossess your car.
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 sell it, buy a cheaper one and pay in the difference to your IVA. But that is pretty unusual.
More often the car you own is listed as an excluded asset. You must make sure that this is happening to your car – get it in writing from your IVA firm before signing up to an IVA.
HP, PCP & leasing – issues at the start of an IVA
For HP, PCP and leasing, the finance company legally owns the car, not you.
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 finance 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, some creditors may think that you are paying too much.
Some seem to use a fixed number and may vote against an IVA if you are paying more than say £250 a month. Your IVA firm may be able to tell from looking at your creditors if this is likely to be a problem in getting your IVA approved.
The finance company may end your contract
Your car finance documentation may have a clause that says the lende can end the contract if you go bankrupt or enter insolvency, which includes an IVA.
Why they should want to do this is baffling if you are carrying on making the correct payments. Many lenders are happy for you to continue, despite the fact they could legally cancel the contract.
But a few lenders do decide to end the contract and you have to return the car. In 2023 this is not common but it can be a disaster if it happens to you.
And some of them only wake up to the fact you have an IVA after several months. So it’s possible you will get a nasty surprise letter after a while 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 the IVA forum 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. With an IVA on your credit record, you will no longer be able to get car finance at an OK price, see below.
What happens when an HP contract ends during an IVA
At the end of an HP contract, you 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 as you have more spare income. So you shouldn’t expect to be better off at that point. This may mean you pay a lot more into your IVA than you expect.
Before starting an IVA, you must ask what will happen here. If you want the car to be excluded so you don’t have to sell it, tell your IVA firm this and get it in writing that you won’t have to sell it.
What happens when a PCP or lease contract ends during an IVA
(I am assuming here that you need a car. if you don’#’t, then the car goes back and your IVA payments go up as you are no longer paying the car finance. )
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 current car with the existing lender or get a new PCP contract – but this is almost always refused because of the IVA on your credit record.
- You could pay the balloon payment and keep the car. You will find it difficult to borrow the money yourself and would need the consent of your IVA firm. Could a relative do this for you? 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. This can be very expensive, with interest rates of well over 30%. As a result you will probably only be able to afford a pretty old second hand car.
- You could take an IVA payment break for some months before your PCP contract 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 you can’t get a replacement that costs the same as or less than you are currently paying… Because it won’t be easy at all.