Tackling your debts

Is your car finance driving you into a debt problem?

Posted 11 May 2017

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More and more of us have car finance. If you are struggling to meet your repayments it’s important to know what type of finance you’ve got and how to tackle it

Do you have a car loan or finance? If you do, you’re certainly not the only one. More people are borrowing to buy a car. But if you start to struggle with your repayments what should you do? If your car is essential – for example to get the kids to school or for the commute to work you won’t want to lose it.

What kind of finance do you have?

First of all, you need to understand what kind of car finance you have. Most types of car finance are secured against the vehicle and this means you could lose your car if you fail to stay on top of the payments, just like you could lose your home if you don’t keep up with your mortgage.

The main types of secured car finance are Hire Purchase and PCPs. With Hire Purchase you pay a deposit and a monthly amount towards the cost of the car, but the car isn’t yours until you make the final payment. If you can’t keep up you’re your payments, you are able to hand the car back – as long as you’ve paid over half of the agreed amount, you normally don’t have to pay anything else.

Personal Contract Purchases have seen a surge in popularity recently. You have to put a deposit down and pay a monthly amount, but these amounts tend to be lower than with other car finance options, so initially it can be a cheaper way of getting a new car.

At the end of your agreement you can hand the car back, get a new deal, or choose to buy your car by paying a final large payment, known as a ‘balloon’ payment. If you’re unable to make your PCP repayments, the company can repossess the car. It might be possible for you to hand the car back early, but there may still be a cost for doing this.

You can also get unsecured car loans (personal loans), where you borrow a sum of money specifically to buy a car. You’re then left with the repayments to your lender, but you will own the car and it won’t be taken away if you’re unable to make the payments.

Get help with your debts

 It might be possible for you to come to some sort of arrangement to ease the strain on your finances. Or see whether you can tweak your budget and free up some more cash for your car repayments.

If you can’t afford your car repayments because of other unsecured debts, a debt solution might be able to help. What happens to your car depends on the type of debt solution you start. For example, if you go bankrupt you can keep your car as long as you need it day-to-day and it’s not worth more than £1,000.

If you were to start an informal debt solution, like a Debt Management Plan (DMP), your payments would allow you to keep paying any other secured payments, like a car loan. Make sure you speak to a trained debt advisor, they will look at your situation, take everything into account and tell you which debt solution, if any, is best for you.

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.