Car Payments (Hire Purchase)
Hire purchase is a common form of finance used when buying a car. Hire purchase finance agreements can be complex, however, and strict terms come into play if you fall behind with repayments.
So how does hire purchase work in relation to buying a car and what can you do if you fall into arrears?
How does hire purchase work when you buy a car?
When you buy a car on hire purchase, you make repayments in pre-agreed monthly instalments for a fixed period of time. One of the fundamental aspects of hire purchase is that you do not actually own the vehicle until the final repayment is made.
This means you are essentially hiring the car, and unable to sell it without the financier’s agreement. If you fall into arrears with your hire purchase contract there may be a number of options available, but ultimately the lender has the right to repossess your car if you cannot afford to pay.
What happens if you have hire purchase debt?
Your lender will contact you if you miss a payment, and is likely to send a default notice if you do not respond or continue to miss payments. They may be open to reducing your repayment amounts if you are proactive in contacting them, or perhaps allowing you to repay your arrears over time.
If you have paid less than a third of the total finance amount and the car is not on your own land, the lender can repossess it without a court order. They do need to apply to the court to repossess the vehicle if you have paid more than a third of the original finance agreement, or the car is kept on your private land.
Once repossessed, the car will be sold at auction to raise the money to repay your hire purchase agreement. If insufficient funds are raised from the sale the lender can take court action against you to recover the balance outstanding.
What can you do if you fall into arrears with hire purchase?
Terminate the contract
You can voluntarily end the hire purchase contract and return the vehicle. You will need to pay all instalments up until the contract is terminated, and although this is not an ideal solution because you will lose your vehicle, it could prevent you from getting into more serious debt.
A Time Order may be granted by the court, allowing you more time to repay your arrears or potentially a lower, more affordable, monthly repayment for the longer-term.
Individual Voluntary Arrangement (IVA)
An IVA is an official debt procedure that repays unsecured debt over an extended period. It could be an appropriate solution if you owe money to other creditors, as although hire purchase arrears are not included in an IVA, they are taken into account as part of the budgeting process.
This means the IVA repayment amount is calculated only when your essential costs, including your hire purchase payments, have been accounted for. Additionally, if there are arrears outstanding when a hire purchase agreement is terminated, this shortfall is an unsecured debt that can be included in the IVA in its own right.
If you declare bankruptcy the hire purchase contract will be cancelled, and you hand back the vehicle. Bankruptcy is typically used when there are no alternatives remaining, as it involves the transfer of all your assets including your property if you are a homeowner.
If you are struggling to meet your car repayments and would like more information on the possible solutions, call UK Debt. We offer free same-day consultations and can quickly assess the best way forward.