How different car finance options are affected by missed payments:
Car finance payments are a popular way to buy cars. People are using different car finance options, including hire purchase, a personal contract plan, personal loan or logbook loan, for example. Read on for what these types of purchases mean and how they are affected by missed payments.
Hire purchase, otherwise known as a conditional sale agreement, is where you pay off the car through regular financial payments. This is usually provided by an independent finance company instead of a car dealership. The car belongs to the finance company until you have completed all the payments, so you can’t sell it until then.
If you find yourself unable to make car payments, you should contact the finance company and let them know. It’s possible that they might grant you an extension, however, they aren’t legally required to do so.
Another option is to hand the car back, although you won’t get any of your payments refunded this way. If you have paid less than half the agreed amount, or haven’t made your payments on time, you may owe the company half the full amount - minus what you've already paid (even if you give the car back).
For example, if the car cost £10,000 and you have paid off £4,000, you may owe a further £1,000 if you decide to return the car – to bring your total payments up to £5,000.
If you don’t make any payments and don’t hand the car back, the company can legally reclaim it. The first step they will take is to hand you an 'arrears notice', which is a letter informing you of how much you owe. They then have to send you arrears notices with intervals of no less than six months before they can obtain a court order.
If you ignore the arrears notices, the finance company can hand you a final notice, giving you 14 days to pay before they can repossess the car - and the remainder of the owed funds.
Note: They only need a court order to repossess the car if you have made more than a third of the required payments.
Personal contract plan (PCP)
A personal contract plan (PCP) is similar to hire purchase in that the finance company owns the car until you've made your final payment. This type of agreement normally covers three years’ worth of payments and covers the car’s expected drop in value.
For example, if the car was worth £10,000 when you bought it and the car dealership estimates its worth at £7,000 three years from now, you’ll pay £3,000 over three years. After the three years is up, you can either give the car back to the dealership, (provided the car is in good condition), or purchase it outright for a further £7,000.
You can’t sell the car until you have paid off the entire balance. The finance company can repossess it if you fail to make the agreed payments. You can also hand the car back if you've paid half the agreed amount. In our example above, half would amount to £1,500 (out of £3,000). If you’ve paid less than half, you may owe the finance company more money. You can check with the company to see if this is the case.
If you’ve paid more than one-third of the PCP amount (£1,000 in our example above), the company will need a court order to be able to repossess the car. They can only repossess it without a court order if you have paid less than one third.
They will need to send you an arrears notice to inform you that they're missing payments and how much you owe. They should continue handing you these notices at intervals of no less than six months until they have a court order. Then they can send you a final notice, which gives you 14 days to pay before they terminate the agreement and demand that you return the car.
If you take out a personal loan to buy your car, then you own it from the beginning, and it can’t be repossessed by the loan company. This is because the loan is a separate financial agreement and is not tied to your car purchase. However, you don’t have the option to return the car and stop making payments.
If you are worried about missing a car finance payment you can ask the loan company for a payment break. Whether they grant it depends on the terms and conditions of your loan. Be careful with this, as there may be extra fees and hidden costs involved. You also have the option of selling the car at any time, which would help to pay off your loan.
A logbook loan is where you borrow money using your car as security. This means that ownership of the car stays with the finance company until you’ve paid off the loan.
The amount you can borrow depends on how much your car is worth. The payments are usually spread over one to three years, with very high interest rates – often 300% APR or more. This means you could end up paying back double the amount you borrowed.
If you miss three to six payments, the finance company will send you a default notice asking you to bring the account up to date. They normally give you the legal minimum of fourteen days to pay the arrears and they can repossess your car if you don’t pay.
Can I take a payment holiday on my car finance?
For hire purchases and personal contract plans:
- If you are unable to pay due to Coronavirus* you may be able to freeze your payments for up to six months under the Financial Conduct Authority’s (FCA) guidance.
- If you are unable to pay for any other reason, you can contact the finance company and ask for them to extend the agreed payment period. It’s up to them whether or not they comply with this.
For personal loans and logbook loans:
- If you are unable to pay due to Coronavirus, you may be entitled to a payment holiday. This will depend on the type of loan and your individual circumstances. You may be able to get a payment holiday for up to six months under the FCA’s coronavirus regulations. Bear in mind that interest will continue to accrue in the background, which means you may end up paying more overall. The term of your loan is also likely to increase.
- If you are unable to pay for any other reason, whether you are entitled to a payment holiday depends on the terms and conditions of your loan. You should check with your loan provider.
Note important dates: Consumers will have until 31 March 2021 to apply for an initial or a further payment deferral. The FCA also advise that: "Consumer credit firms will be able to repossess goods and vehicles from 31 January 2021. However, this should only be as a last resort.".
How will late car finance payment affect my credit score?
Late payments can have a negative effect on your credit score. How much impact it has will depend on the condition of your credit history to begin with, as well as how recent the late payment was. The good news is, paying off your debt can help to improve your credit score. Though any late payment markers will stay on your credit report for six years - even if you pay the debt off. Once cleared, it will be updated to ‘fully satisfied’.
What support is available if I’m struggling to make repayments?
We suggest that you seek financial advice if you are worried about missing a car finance payment – as well as your lender. You can contact organisations like Citizen’s Advice and StepChange for free and non-judgmental advice.
It is important to be open with your finance provider if you have missed a payment. We suggest that you contact them as well as exploring the options above.
* Please bear in mind that this is correct at the time of writing (28th January 2021), but the situation is subject to change.