Can you afford your monthly car payments?
You may have lost your job or be worried that may happen. You or your partner may have had their hours cut. Or your business may be making less money.
Or your other bills may have gone up a lot. Mortgage, rent, petrol, energy bills, council tax, food…
What sort of car finance do you have?
This article looks at your options if you have a Hire Purchase contract (HP) or Personal Contract Purchase (PCP). These are the two most common types of car finance in the UK.
Other types include:
- a lease, where you aren’t buying the car at all. This may be called contract hire or Personal Contract Hire (PCH). The VT and Time Order sections discussed on this page do not apply to leases.
- an unsecured loan, perhaps from your bank. Here you own the car and the loan is just a normal loan, not a priority debt. This page isn’t relevant because your car is not at risk even if you stop paying the loan;
- a business contract. This article doesn’t cover these. Talk to Business Debtline for advice on this.
If you aren’t sure, talk to a debt adviser as it makes a big difference to the options that you have.
First get a detailed budget
It’s important you work out how much you can realistically pay to the car finance.
Use this budget sheet from National Debtline, It can help you understand your overall financial position. And you can also show it to your lender.
You may not be sure about some numbers, especially if you are waiting for benefits to be paid or you don’t get paid the same amount each month, but this is still helpful.
Can you improve this budget? Make sure you are claiming all the benefits you can. There are millions of people who are sure they aren’t eligible for Pension Credit, Universal Credit or Council Tax Support but who actually are…
Try this benefits calculator and talk to your local Citizens Advice if you want help to claim any you aren’t getting at the moment.
Once you have this budget, you have 4 options about the car finance:
1) stop paying other debts to pay more to the car finance
Car finance is a “priority debt” because the lender can repossess the car.
With a priority debt, the lender will expect you to pay them instead of paying you non-priority debts such as credit cards, normal loans and catalogues. See What are priority debts and bills? for details.
So if paying little or nothing to your credit cards will let you pay your normal car finance, you have to do this in order to keep the car.
Here you don’t need to talk to your car finance lender because you can pay them.
- non-priority lenders will understand that you can’t pay them because car finance is a priority debt;
- this will affect your credit score, but if you can’t afford the normal payments, there is no way around this.
The budget sheet above will show what you can afford to offer to non-priority debts.
If you aren’t sure if this is necessary or what to do, talk to National Debtline.
When you have a lot of creditors, it may be easier to get a Debt Management Plan set up with Stepchange – there they talk to all your non-priority creditors for you.
Importantly in 2023, if you have a mortgage fix ending, with the large majority of mortgage lenders you do not have to worry about a poor credit record if you only want a new fix, as your current mortgage lender in most cases won’t check your credit record of affordability.
2) Voluntary Termination (VT)
If you have a Hire Purchase contract (HP) or and Personal Contract Purchase (PCP) you need to know about your right to Voluntarily Terminate (VT) car finance. This does not apply to lease contracts.
It’s usually better to voluntarily terminate your car finance and hand back the car than have a car repossessed because you will owe a lot less, possibly no, money.
An overview of Voluntary Termination
When you VT a car, you hand back the keys and only have to pay “half the amount” payable under the agreement – this number is given in your HP or PCP agreement paperwork – dig it out and have a look. So:
- if you have already paid more than half you can hand the car back and not owe any more money (unless you have arrears, which you will still owe);
- if you have paid less than half you can still hand the car back now and only owe the remainder of this amount. This is then just a debt to be repaid, not a priority.
Say “half the amount” is £8,000. If you have paid 20 payments of £300, that is £6,000. If you VT the car you would still owe £2,000.
If a lender repossesses your car or you hand back the keys and don’t say you want to VT it, then you would owe the total remaining on the contract minus what the dealer can sell it for at auction. That is often a lot more than if you terminate the finance.
Using the same above VT example:
If your car is repossessed, you would owe the full amount of £16,000 minus what the car would be sold for at auction. If it is only £10,000 you would end up still owing £6,000.
If you are going to lose the car anyway, you should try to end up owing as little as possible!
If you aren’t sure about the numbers for your car, talk to National Debtline on 0808 808 4000.
You can’t terminate the contract yourself if it has already been terminated by the dealer. So if you are sent a Default Notice, you have to decide very fast whether to VT your contact – because after 14 days you may lose the right to do this.
This is just a brief summary. How to terminate your car finance early looks in detail at how to VT a car, its condition, mileage payments and other important details.
Can you manage without the car?
Unless you are sure your financial problems will be over soon, think about life without the car:
- in a two-car household, manage with just one;
- look at options for public transport, cycling, car-sharing, or car rental;
- if you can now work from home some or all of the time, how much less do you need a car.
Facing a financial crisis, you may have to put up with some inconvenience. Getting rid of a car will also save on petrol, MOT & servicing, car tax, insurance and parking costs.
Obviously, if you are close to the end of a HP contract, you don’t want to hand it back as you are close to owning it.
But early in a HP contract, or in a PCP contract where you will never be able to own the car, you should seriously consider terminating the car finance if you have big money problems and you think this is going to last a long while.
If you think it’s likely you will have to lose the car in a few months, it may be less stressful to do it now and have more money to pay to your rent or mortgage.
3) Apply to the court for a Time Order
This is not an easy option. Time Orders are unusual.
National Debtline has a good factsheet on Time Orders. It says:
You may be able to use a time order to reschedule the payments on your agreement. A time order and an order to change the interest rate may be a good option if you have fallen behind with your payments. You may be able to stop the creditor repossessing your goods.
You can apply for a time order if you have been sent an arrears notice, a default notice or the lender has already started repossession proceedings. You can’t apply if you currently up to date with payments.
You have to start a court case and you may have to argue it before a district judge who has never seen an application for a Time Order before. If you lose, extra costs may be added to your debt.
4) Talk to the car finance lender about lower payments
Lenders could agree to reduced payments, a small token payment or even no payments for a period.
But with car finance, if you don’t make the normal payments then your car is at risk – the lender may repossess it.
So will lenders agree to accept less? Many car finance lenders may not be sympathetic. Before you pick up the phone it’s good to be clear on your budget and what your other options are.
Don’t panic and offer more than will be manageable, because you will just have to phone them up in a month or two and ask to pay even less.
Showing your lender your budget sheet can make this conversation easier. It will prove to your lender that you aren’t paying non-priority debts. And that you are offering as much as is realistic.
It may not be as hard as you think…
A lot of people have major financial problems in 2023. Repossessing a car is a hassle and an expense.
So it is possible the lender may prefer to accept a lower payment for a few months in the hope that your situation will later improve.
Especially if you are offering £200 a month when the actual agreement is for £260, so it’s not much less. Or if there is a good reason why your situation will improve in a few months.
Arrangements with your lender will be shown on your credit record.
There isn’t a way around this. It is better to have a “payment arrangement” marker on your record than for it to just show that you have missed payments.
One exception – if you have paid more than half the payments, then you can VT your car and it will not affect your credit record at all. But apart from this, there is always going to be some negative effect on your credit score.
Was the car finance always unaffordable?
You may have heard that you can make an affordability complaint about car finance. Quite a lot of these are being won, especially if the interest rate was high.
Were you sold a car on unaffordable finance? looks at this. You can make this sort of complaint in any of the following situations:
- you are still paying the finance;
- the car has been voluntarily terminated, handed back or repossessed;
- you have finished paying the finance and now own the car.
But these complaints aren’t speedy and you have to keep on paying the car finance while they go through. They are often rejected by the lender so they have to go to the Ombudsman.
So if you can’t pay the car finance at the moment, making an affordability complaint doesn’t solve your immediate problem. You still have to choose one of the options discussed in this article and also make an affordability complaint.
Unsure? Get help from a debt adviser
If you need help, talk to National Debtline on 0808 808 4000.
They can help you get a budget so you know what to offer the car finance lender and your other debts. Knowing more about your different options may make things clearer.