One common question people ask when considering an Individual Voluntary Arrangement (IVA) is how being on this kind of payment plan might affect their chances of purchasing a car on finance.
If you do choose to enter into an IVA, accessing any kind of credit will be more challenging. As long as you can handle the cost of a car alongside your monthly payments, however, it is certainly not impossible to find a plan to suit your unique finance needs.
In this article, you’ll learn what car finance is, how an IVA impacts your ability to get a car finance agreement, and the options available to someone with an IVA.
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What is car finance?
Car finance is an agreement that allows you to purchase a vehicle by making payments over an extended period of time. A finance agreement may be a good option for you if you need a car, but don’t have enough cash to buy a new one outright.
To get a car on finance, you borrow credit from a lender, and repay the total cost of credit by making monthly payments. Providing you keep up with payments, at the end of your car finance agreement you can choose to purchase the vehicle outright, or return it and go elsewhere.
There are several different car finance options, from personal loans, to PCP and hire purchase. You will need a valid driving licence, and it helps to have a good credit score.
This will reassure creditors you can cover the total amount payable over the length of your credit agreement – and that’s what makes it more challenging for those struggling with debts to find a suitable car finance plan.
Does an IVA affect car finance?
Being in an IVA (Individual Voluntary Arrangement) affects any kind of borrowing. If you need a car and want to purchase it on finance, you should refer to the terms of your agreement before you approach lenders about a plan.
For those currently in an IVA, you will normally need permission from the Insolvency Practitioner (IP) dealing with your case to obtain credit of more than £500– so you will definitely need their approval if you want to obtain car finance.
Failure to obtain the permission of your Insolvency Practitioner before you get car finance could ultimately cost you. You will be in breach of the terms of your Individual Voluntary Agreement, and your IVA may fail as a result.
Car finance - What happens during an IVA?
Your Insolvency Practitioner will decide whether or not your car finance request is reasonable based on your circumstances – specifically, whether covering the total amount payable would be with your budget, given your income and expenses.
Getting approval from your Insolvency Practitioner
If committing to a car finance loan is sustainable when taking into account your finance needs, your IP is likely to approve it.
On the other hand, since IVAs involve paying a significant amount of your disposable income towards settling your debts, you may find you are not left with enough income to cover an IVA plus monthly car payments.
Impact on your credit rating
An Individual Voluntary Agreement is a form of insolvency – that means details of the arrangement are recorded on the formal Insolvency Register, as well as your credit file.
This will lower your credit score and give an indication to lenders that you may have had bad credit in the past, making mainstream lenders more cautious when it comes to entering a finance agreement with you.
As well as affecting your credit score, being in an IVA will also limit the car finance programmes you are eligible for.
What car finances options are available?
There are several different ways to get a new car on finance. Each of the following forms of car finance agreement are available to those on an IVA, although some are easier to manage than others.
Can I get Hire Purchase during an IVA?
A Hire Purchase (HP) agreement is a way of buying a car by paying an amount up front – your deposit – and spreading the rest of the cost over monthly payments. With a HP agreement, you will automatically own the vehicle once you make the final payment.
HP comes with interest, known as APR. APR (Annual Percentage Rate) represents the percentage you will pay on top of your borrowing. Like interest, APR varies depending on the lender. The total cost of credit on a HP agreement is the price of the vehicle, plus the APR amount, over the length of the plan.
It is possible to get a Hire Purchase plan while using an IVA, though it comes with challenges.
Your Insolvency Practitioner will want to ensure you’re not paying too much towards the plan, and may force you to look at cheaper options while you’re on an IVA, i.e. using public transport.
What about PCP or a lease?
PCP or leasing is similar to Hire Purchase. Like HP, with PCP (Personal Contract Purchase) you will place a deposit on the car and make monthly payments towards it for a fixed period of time – with APR included.
Unlike HP, however, you will not own the vehicle at the end of the agreement unless you make a balloon payment towards it. The balloon payment is a lump sum you will pay at the end of your plan if you would like to own the car outright.
The lump sum is usually a sizeable fee, and will be calculated based on what the lender thinks the vehicle will be worth once your finance deal ends.
IVA holders face similar challenges getting a PCP deal as they would with a HP agreement. Because you do not own the vehicle – or won’t until the end of the agreement – your Insolvency Practitioner may have cause to end your agreement early, or recommend cheaper alternatives.
Can I purchase a car with a personal loan?
Buying a car with a personal loan is slightly different. If you bought a car with a personal loan going into your IVA, you will include it in the arrangement. You are considered the owner of the car, so you will have to keep up with payments if you want to keep the vehicle.
If you want to purchase a car with a personal loan during an IVA, you may find it more difficult to finance. Because the IVA will show up in your credit history, mainstream lenders are often reluctant to let you borrow from them, so you might have to seek out a specialist lender.
Is there car finance for people with bad credit?
There are companies out there which specialise in providing car finance to customers with poor credit scores. Businesses like Red Potato or moneybarn target people with bad credit, or histories of struggling to manage debt.
Their appeal is obvious. They make it possible for customers to access car finance, even if they have:
- An IVA
- County Court Judgements (CCJ)
- They’ve been declared bankrupt
- They aren’t able to raise a deposit
Just because it’s possible, however, doesn’t mean it’s recommended. It’s important to be cautious when approaching lenders like these – borrowing money when you have a poor credit history can be very expensive.
If you have a CCJ taken out against you, for example, a specialist lender knows you won’t get finance elsewhere. They will use that CCJ to charge you higher premiums, and make you pay more to finance your vehicle than you would anywhere else.
How will an IVA affect my credit rating?
If you think that an IVA is the best solution for dealing with your debt, try not to be put off by the fact that accessing credit will become more difficult.
Like most debt solutions, an IVA will leave a mark on your credit history. The fact that you needed an IVA to address your debt problem will be an indication to creditors that in the past you have not repaid debts in their full amount.
That may hurt your credit score in the short term, but shouldn’t discourage you from using an IVA.
Writing off your unaffordable debt and getting a fresh financial start is likely to be the best option in the long run, and with a little patience, you will be able to rebuild your credit score and have more success with creditors.
You could write off up to 81% of your unsecured debt today
Will an IVA take my car?
It’s important to understand that, though you may wish to buy or maintain a car during your IVA, there are circumstances under which it can be taken from you.
An IVA is all about living within your means, and putting as much money as you can afford towards the repayment of your debts. If your IP deems it a valuable enough asset, they can ask you to sell your vehicle, buy a cheaper one, and put the rest of the money towards your IVA.
Do I need car finance during an IVA?
If you are in an IVA, it is vital to weigh up whether you really need car finance. Of course, for some people, having access to a reliable vehicle is vital to their work, and purchasing one outright may be a struggle. In this instance, you might feel that a car finance loan is your only option.
However, if you can manage without a car temporarily – for example by using public transport or organising a carpool – it is definitely worthwhile saving money. You will be able to end your IVA more quickly, leaving you with the funds you need to purchase a car outright.
Should I purchase a used car during my IVA?
Another alternative to finance is buying a used car. It’s a well-known fact that a new vehicle’s value plummets the moment it is driven out of the showroom, and you can take advantage of this by purchasing one second hand.
If you need credit to purchase a car in this way, shop around. Car finance companies will not necessarily have the best value loans. You might consider approaching a credit union, as they are known for helping people who would otherwise struggle to access a loan.
Can I get car finance after an IVA?
Information about your IVA will be removed from the Insolvency Register as soon as you make your final payment. It will remain on your credit file a bit longer – around a year, depending on the length of your IVA. This can drag down your credit score temporarily.
Even though you no longer need anyone’s permission to apply for credit, it can still be challenging to find a suitable lender. In this instance, waiting until you have rebuilt your credit score before applying for car finance is the best option, as you will be able to access better deals.
However, this is not an option if you are in desperate need of a car. Just like during an IVA, approaching a variety of lenders can be a good idea. Credit unions may be a good option if you are struggling to find companies who will approve your application.
Where can I get more information on car finance and IVAs?
There are many people out there who are struggling with debt but still need, or want, a car. If you’re in need of a debt solution and find yourself in that situation, you can talk to IVA Plan.
Our customer service team are experts in IVAs, and have experience of helping customers with queries of all kinds, from getting car finance during an IVA, to how an IVA affects homeowners, and more.
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