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What happens next when you’re struggling with keeping your car payments ticking over

Car Finance Debts overview

When using car finance to purchase a vehicle, either through a Hire Purchase agreement or Personal Contract Purchase (PCP), your car remains owned by the finance company until fully repaid.

In most instances, the finance will be provided by an external company to the garage/dealership.

The differences between Hire Purchase (HP) and Personal Contract Purchase (PCP)

Using a Personal Contract Purchase (PCP)

Usually, these agreements run over three years, with a ‘guaranteed future value’ decided when the credit is taken out which estimates the car’s value after this time, this will be based on the model and estimated mileage.

As a working example, you finance a car worth £15,000, and the garage estimates a future value of £10,000 after three years. The amount you’ll finance over these years is £5,000, on which interest is paid. After the term, you can either hand the vehicle back or choose to purchase the car by paying the balance that remains. This is known as a balloon payment.

Using Hire Purchase

In contrast to PCP, Hire Purchase involves financing the complete cost of the car, so you’ll make repayments not only on the car’s value, but also on the value it losses over its lifetime (known as depreciation). However the length of time a HP purchase agreement runs for can be longer than three years, running until the entirety of the vehicle is repaid.

The advantages of using Car Finance Loans as a credit solution

  • Car finance can be suited to those with an average or above average credit score.
  • Car finance is often seen as a convenient, immediate form of finance, with most applications processed and approved within the hour while at the garage or dealership.

Worried about debts that won't go away?

The disadvantages of Car Finance Loans as a credit solution

  • You’re not permitted to sell your vehicle while on HP or conditional sale during the agreement, as it isn’t yours to sell.
  • If you fall behind with your car finance repayments, the finance company are entitled to repossess the car.
  • If you’ve not yet repaid one third of the total credit, repossession will usually end up in the courts, where the finance company would seek to recover the full repayment, plus any expenses/costs incurred due to the repossession and/or legal process.
  • Given that you don’t own the financed vehicle outright until the final payment is made, a personal loan may be a more suitable credit option. Using a personal loan provides you with more freedom should you encounter financial hardship, such as the option of selling the vehicle at any time. That said, you’ll lose the opportunity of being able to simply hand the vehicle back at the half-way stage.

Debt help tips for tackling Car Finance Loan Debts

  • If you’re struggling with your car repayments and have reached at least the half-way point of your agreement, you can hand the car back and, in most cases, have nothing more to pay. Should you choose to do this, you’ll usually ‘lose’ all the repayments you’ve made thus far.

IVAs – A potential debt solution for Car Finance debt

If you’re struggling under the stress and strain of mounting debt, including car finance, an Individual Voluntary Arrangement may provide for light at the end of the tunnel.

An IVA is a form of debt settlement designed for debts above £5,000 owed to two or more creditors. IVAs last for either five or six years, over which period you would repay your debts at a rate you can genuinely afford.

*An Individual Voluntary Arrangement (‘IVA’) is subject to the customer meeting qualifying criteria and gaining creditor acceptance. Monthly IVA payments include fees and may differ to the example provided, based on the assessment made of your own personal circumstances – these fees will be clearly explained to you in writing by your IVA company. Debt write off amounts are subject to creditor acceptance and vary by individual customer based on their own financial circumstances, and are applied upon successful IVA completion.

Substantiation example, Someone owes £60,000, they pay £100 over 60 months which equals £6000, write off amount would be £54,000 which is 90% of total debt level. Upon submitting your details on this website we will pass your details to one of our approved partners as this website does not give any advice.

Free debt counseling, debt adjusting and credit information services are available from the Money Advice Service.

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