Car Finance Debt – New 2023 Laws & Your Rights

Are you worried about paying your car finance? Do you need information on how to manage or get out of your car finance agreement?

You’re in the right place. Every month, over 170,000 people visit our website for advice on problems just like yours. We’re here to help.

This article will explain:

•  The new 2023 laws about car finance debt
•  Your rights if you have car finance debt
•  Different types of car finance agreements
•  What happens if you can’t pay your car finance
•  How to manage your car finance payments

We know how stressful it can be when you’re having trouble paying your car finance; some of our team have been in the same situation.

We’re here to help you understand how to manage your car finance debt. Let’s dive in.

What is the cheapest way to finance a car?

The cheapest way to finance a car in terms of upfront costs would be to secure a car financing agreement, typically known as just “car finance”. 

What is car finance?

Car finance refers to different financial products that are taken out by individuals who wish to buy a car. The credit you receive can only be used to buy vehicles. 

Some vehicles might be excluded from the agreement, similar to how some derelict properties don’t qualify for mortgages. 

Don’t worry, here’s what to do!

There are several debt solutions in the UK, choosing the right one for you could write off some of your unaffordable debt, but the wrong one may be expensive and drawn out. 

Fill out the 5 step form to find out more.

Are there different types of car finance agreements?

Yes, there are various car financing agreements just like there are many different types of personal loans and credit cards. 

What are the different types of car finance?

There are several different types of car financing agreements, but the two most common are a Hire Purchase Agreement (HP) and a Personal Contract Purchase (PCP). Some people wanting to buy a new car don’t use car finance at all; instead choosing to use a personal loan. 

#1: Hire Purchase Agreement

A Hire Purchase Agreement is when you pay to hire the vehicle from the car financing company but own the car outright once you have paid the final monthly payment. 

With an HP Agreement, you put down a deposit and then make monthly repayments to the car finance company (including interest payments). The size of your deposit will affect how much additional credit you need to borrow and will therefore affect the size of your monthly payments. 

An HP Agreement is comparable to a secured loan because the vehicle is used as security within the credit agreement. If you fail to keep up with monthly payments, the car finance lender can repossess the vehicle from you. 

#2: Personal Contract Purchase

A Personal Contract Purchase is similar to an HP Agreement in some ways. You’ll also put down a deposit and make monthly repayments. These car finance payments usually last anywhere from one to a couple of years. 

At the end of the repayment term, you’ll have the option of:

1. Giving back the vehicle in exchange for your equity in it, which could then be used to finance another vehicle. 
2. Become the vehicle owner by making a final balloon payment, formally known as paying the Guaranteed Future Minimum Value (GFMV)

However, you might also need to pay additional charges to the lender in either situation above, such as exceeding the expected mileage or causing damage to the vehicle.

An alternative to this type of finance is Personal Contract Hire. In this car finance deal, you simply lease the vehicle and give it back at the end of the term.  

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Will I get accepted for car finance?

Car finance will be approved based on its affordability to you and your credit report. 

Car finance companies will ensure you can meet repayments by assessing your personal finances, and they will check your credit file to see how you’ve handled your finances in the last six years. 

Can I get car finance if I’m a young driver?

Yes, young drivers can be approved for car finance as long as they meet the affordability and credit rating checks carried out by the car finance provider. 

One issue young drivers could face is a lack of credit history. As a young person, you might not have built up enough of a credit history, and some lenders may not approve you for this reason. 

What details do I need to apply for car finance?

When applying for car finance, you’ll need to supply the car finance company with several documents. These typically are:

1. Proof of identification which matches your personal details
2. Proof of driver’s licence if not used as your proof of identity 
3. Your address history, usually covering the last three years
4. Proof of your regular income, such as payslips or tax returns
5. Proof of existing debt repayments
6. Permission to use car finance from an Official Receiver (if using a formal debt solution to pay back existing debts)

How quickly can I get a car loan?

Applications for car finance can be approved quickly, often within two working days. The speed of getting approval will hinge on several factors. 

Car finance companies

You can now learn about some of the most used car financing companies in the UK with MoneyNerd. There are scores of options in the market, but you can start or expand your search here.

Is car finance classed as a debt?

By taking out car finance, you’re taking on a debt that needs to be repaid. This isn’t the same as having arrears, which refers to missed payments. 

For more information on managing debts or dealing with arrears, head back to the MoneyNerd debt info hub. 

How should I manage my car finance payments?

It’s important to repay your car finance repayments as agreed and on time. You should incorporate these repayments into your budget to help you stay on top of them. 

You might want to overpay on your car loan when possible, such as receiving a small windfall – but be aware of any overpayment or early repayment charges.

What happens if you don’t pay car finance?

If you miss a car finance payment, the lender will first get in touch to notify you of the missed payment and ask you to repay quickly. If you still fail to repay, they can register the finance agreement as defaulted. This will damage your credit file. 

To recover the money owed, the car financing company can chase you for payments and may even get a debt collection agency to chase you on its behalf. You should expect legal threats if you don’t pay.

It’s possible that the car financing company will take legal action to recover the money. They do this by asking a court to order you to pay via a County Court Judgment (CCJ). If you still don’t pay what’s owed or cannot agree on a repayment plan, the car finance company could ask the court for permission to enforce the debt. 

Debts like these are often enforced with bailiffs or by deducting money from your income with an Attachment of Earnings Order. 

Can a financed car be repossessed?

Many car finance agreements state that the lender is the vehicle owner until all repayments have been made. Thus, the company would repossess the vehicle as soon as the car financing agreement has defaulted. 

They will notify you after the default that the agreement has been terminated. 

How does vehicle repossession work?

In England or Wales, the company usually doesn’t need a court order to repossess the vehicle. But this depends on how much of the car loan has already been paid off. You must surrender the vehicle without a court order if you’ve cleared one-third or less of the debt. 

In Scotland, car financing companies must always get a court order to repossess the vehicle.

Once repossessed, the vehicle is sold at an auction where vehicles can sell below their market value. This is bad news for you because if the money raised from the sale doesn’t cover the remainder of the agreement, the car finance company can add the shortfall to your arrears. 

These arrears could also be chased as part of court action, bailiffs and an Attachment of Earnings Order.  

Returning the vehicle

When you hand back the vehicle, make sure you take plenty of clear photos. This is to prove the vehicle’s condition when it was returned. Some wear and tear is expected, but lenders may try to claw more from you by claiming scuffs, scratches and damage. 

You may be asked to drive it to a registered office, but this must be a reasonable distance from your home. Alternatively, they can do a collection from your home. There must be no charge for a collection service! 

Can I take a car finance payment break?

Yes, you might be able to avoid defaulting on your agreement by taking a car finance payment holiday. 

This is a fixed period of time where you don’t need to make any car finance repayments. However, interest might still be applied during this period, causing the debt to increase.

How long can you go without paying your monthly payments?

The extent of your car finance payment break will be determined by your lender and the agreement you signed. 

Can you walk away from car finance?

Yes, under most car finance agreements you can end the agreement early and give back the vehicle, as per the Consumer Credit Act 1974. This is known as Voluntary Termination. 

When should I end my finance deal early?

A common reason for ending a car finance agreement early is to avoid getting into arrears or bigger arrears. This could then avoid a CCJ, bailiffs or an Attachment of Earnings Order. 

A change in circumstances, such as losing your job, could make keeping up with repayments impossible. In this situation, it might be best to terminate the agreement. 

Other reasons to end car finance early include:

1. You no longer need the vehicle
2. You think you can buy a car a different way while reducing overall cost

How do I get out of car finance debt?

You can escape your HP or PCP Agreement with Voluntary Termination if you have already paid half of the money back, or if you’re willing to make a lump sum payment to pay at least half of the money back.

To do this, you’ll simply need to inform the car finance provider that you’re using Voluntary Termination and follow the process relayed to you. 

A Voluntary Termination is recorded on your credit report, but it doesn’t make a significant difference to your credit score. However, having multiple Voluntary Terminations could cause car finance companies to reject your applications in the future.  

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Can I sell my car if it’s still on finance?

If the car finance agreement you signed states that the company owns the car until the final payment is made, you won’t be allowed to sell the vehicle. 

As you’re not the legal owner of the vehicle, it isn’t yours to sell. This would apply to both HP and PCP agreements. 

Can you go to jail for not paying a loan?

You cannot be sent to prison for not paying a loan, including a car finance loan. But this shouldn’t be seen as a reason to deal with your car finance debt and arrears.