Car finance debt – What happens if I can’t pay?

Image of author, Maxine McCreadie

Maxine McCreadie


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For many of us, a car is the most valuable item we own. When people experience financial difficulties, the thought they may lose their vehicle can become a huge concern, particularly when they need one to get back and forward from work.

In this guide we’ll explore car finance, including what it is, how it works, and what to do if you can’t afford your car finance payments or get into trouble with your finance company.

What is car finance?

Many of us can’t afford to buy a car outright, and instead rely on car finance. Car finance is an umbrella term the process of purchasing a vehicle over time through a series of installments.

Car finance works in a similar way to a mortgage. You will put down a deposit, usually around 10% of the total price of the vehicle, and pay towards the through a series of monthly payments. As with a mortgage, for certain types of car finance, you won’t take full ownership of the vehicle until your final payment.

For many, car finance payments are the second largest household expenditure after their rent or mortgage payments. While getting a car on finance offers people a convenient way to purchase a vehicle, it can also be a catalyst for debt problems if people can’t keep up with their payments.

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Is a car payment considered a debt?

Yes, car payments are considered a debt, because monthly payments towards a car likely means you have purchased the vehicle on finance, in which case you’re don’t have full ownership.

If someone has a car through a finance agreement, then normally they don’t own it until the final payment for it has been made. It remains the property of the finance firm.

If they then go into arrears with their car payments, the finance firm will explore different options for reclaiming that debt, from sending an arrears notice to repossessing the vehicle.

Are there different types of car finance agreement?

There are two main forms of car finance agreement: hire purchase (or conditional sale) agreements, and personal contract plans (PCP), both of which require people to make monthly payments for their cars.

Hire Purchase (HP)

Hire Purchase is one of the least complicated ways to buy a car through installments, and works in much the same way as a mortgage on your home.

You buy the car from a finance company or lender, and put down a deposit up front. You will then pay a series of monthly installments towards the vehicle and, after your final payment, the car is yours (although you can of course use the vehicle while you pay it off.)

Personal Contract Purchase (PCP)

A PCP agreement is a slightly more complex finance option. It works similarly to hire purchase in the sense that you will make a series of monthly installments towards the car. At the end of your agreement, however, you won’t automatically own the vehicle. Instead you can:

  • Choose to return the car
  • Choose to pay the resale value (the car’s value at the end of the contract) and keep it
  • Choose to take the resale value and put it towards buying another car

As with hire purchase, you will need a deposit of around 10% to be accepted for a PCP agreement, although you will also need to come through a credit check conducted by the lender to make sure you will be able to repay your. car loan debt

Personal contract hire

Personal contract hire is a form of car finance, although with PCH you will never own the vehicle. Instead, you simply lease it for a period of time.

Once your contract has come to an end you will simply hand the car back. Because you never own the car under a PCH agreement, it’s important to keep the vehicle in good condition throughout the agreement. If you hand it back damaged, you may face fines and charges.

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What happens when you don’t pay your car finance agreement?

The car finance industry is regulated by the Financial Conduct Authority (FCA) to try protect consumers from predatory lenders, but you will face serious consequences if you continually fail to make your debt payments. Below are some of the actions a lender can take.

Payment reminder from you lender

As soon as you miss your first payment, normally your lender will contact you and send you out a reminder to inform you that you must pay the missed instalment.

Arrears notice

If you then miss a second payment, the firm should then send you an arrears notice, telling you how much you are in arrears. They then have to send these arrears notices at intervals of no less than six months, until you have paid off the arrears or they have obtained a court order.

Default notice

The finance firm can also then send you also a default notice, which will give you 14 days to clear your arrears.

Termination of car finance agreement

If you fail to clear your arrears within 14 days, the firm then has the option to terminate the agreement and not only demand you pay the full amount owing, but also that you return the car.

If you are not in a position to pay the full amount, the company can then begin proceedings to have the car repossessed.

Can a financed car be repossessed?

If you have not paid more than a third of the total amount owed under the agreement (including interest), a finance firm may repossess your car without obtaining a court order, although in Scotland, because Scotland has a different legal system, the firm may always require a court order.

If you have paid more than a third and the firm repossesses a car without a court order, you can claim compensation by going to court. This may mean a judge ordering you have no further liability for the debt, or a judge ordering that all the previous instalments you paid must be refunded.

Where you have made more than a third of the payments, the law provides that the firm must get a court order before it repossesses the car. In England, Wales, and Northern Ireland, this means applying to the County Court; whereas in Scotland it means applying to the Sheriff Courts.

How does vehicle repossession work?

Appearing in court

The court stage is an important one. If you don’t appear or arrange for yourself to be represented, the firm can then ask the court not only for an order requiring you to pay the full amount (including any balloon payments due at the end), but also for you to return the car.

If you fail to return the car, Sheriff Officers or Bailiffs may then be instructed to come and take the car from you.

Time Order Applications

However, the law then gives you a further chance in that even if you cannot pay the full amount, you can ask the court to grant a Time Order. This is an order that allows you to catch up on your arrears, whilst resuming the normal monthly payments. If the court grants this order, this can prevent the car being taken off you.

Selling your car at auction

Where the car is repossessed, it is normally sold by auction, which does not guarantee the best price. Although any funds realised should then be offset against the money that is owed, it rarely is enough to pay off the full debt.

This means you not only lose the car, but you are also left with a debt. This may then mean you could be subject to further enforcement procedures by the Sheriff Officers or bailiffs.

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Where can I get debt advice or a bit more information on car finance debt?

Having a car to get around, drop the kids off at school, or commute to and from work is a basic need for many people. Unfortunately, they can also be a huge expense, and failure to keep up with car payments can leave people facing serious consequences, from the car being repossessed, to court action.

Anyone facing action from bailiffs or Sheriff Officers can turn to government-approved debt help to stop pressure from the people they owe money to, write off unsecured debt, and reduce monthly payments.

If you are looking for further information, make sure to visit our IVA and Car Finance page. Alternatively, if you are struggling with your finances and have, or are at risk of going into arrears with your car finance agreement, get in touch with an IVA Plan adviser for free today.