What If You Cannot Afford Your Car Finance Payments?

Your financial situation cannot be the same throughout the year. You may lose your job or come across some big expenditure. It can be difficult to keep up with car finance payments when your financial situation is turned upside down. Falling behind on payments will have very bad consequences for your credit report. 

You are far from alone if you are struggling to make payments on your car loan. Thankfully, there are options for you to “save your skin”. Make sure that you do not stop making payments on your own without keeping your lenders in the loop. It will “boomerang” on your credit report and your finances. 

Hire purchase (HP) and personal contract purchase (PCP) are the two most common types of car finances. An unsecured loan is another type of loan, particularly one available from a direct lender.

Options you have when you cannot make car finance payments

There are four options available, discussed below, but before that you should get a detailed budget to know how much you can actually pay to your car finance. Use the following table:

Your household	Are you single or married? The number of dependent children Non-dependents Number of vehicles in the household The number of households Any dependent children who are over 16
Your income	Your salary in hand Your spouse’s salary in hand Income from a side gig A fixed income source such as rent Benefits like child benefits, disability benefits and housing benefits Allowances like jobseeker’s allowance, statutory sick pay etc. State pension/private pension Child maintenance Non-dependence  Student loans and grants
Assets	Any assets that can be used for a lump sum payment
Outgoings	Rent, mortgage, loan payments, TV licence Utilities Childcare costs, adultcare costs, any medical treatment Public transport fares, car insurance, road tax, fuel etc. School trips, health insurance, life insurance Personal expenses on clothing, hairdressing, food and housekeeping
Savings	The total amount of savings you have
Debts	Create a list of debts in the order of priority

 

Once you have clarity of your finances, you can consider the following four options:

• Stop paying other debts

Car finance is the priority debt as you are at risk of losing your car in case of a default. When you are struggling to make payments of all debts you owe, it makes sense to prioritise secured debts. For instance, paying little to your credit card will let you pay your car finance. However, you cannot decide to male smaller payments on your own. 

You will have to talk to your credit card provider. Despite the minimum payment, you will end up accruing the interest on your balance. Your lender may decide to freeze payments only for a short period but it depends on their policy and your financial condition. 

Non-payments or making little payments to your credit card will lower your credit score, but that is the only way to deal with this situation. in case you owe to multiple lenders, you should set up a debt management plan. 

• Voluntary termination

Voluntary termination is available to HP and PCP. Lease contracts are not covered under this facility. It is always a better option than having your car repossessed because you might owe less money. You must know about your right of voluntary termination when you sign the deal. 

When you voluntarily terminate the contract, you have to hand back your car keys to your lender and pay half the amount payable under the contract. You can get this information from your contract. 

Situation 1 – if you have already paid half the amount

You just have to hand the car back and do not have to pay any amount provided you have no arrears.

Situation 2 – if you have paid less than half

You will hand the keys back and pay off the remainder of the half amount.

Should you choose not to terminate your contract, your lender will repossess the car in case of a default. Now you will owe the total remaining balance minus the amount your lender received from an auction. Look at the following table for better understanding:

	Voluntarily termination	Repossession
Full amount you owe	£16,000	£16,000
The number of payments you make	20	20
Per instalment amount	£300	£300
Total amount you have paid	£6,000	£6,000
Auction price	NA	£10,000
The amount you owe	£2,000 {£8,000 (half the amount) – £6,000}	£6,000 (£16,000 – £10,000)

 

• Voluntary termination is always a better option as you can avoid paying more than half the amount you owe. 
• You should always try to choose a less costly option when you are about to lose your car anyway. 
• You will have 14 days to decide whether or not to choose a voluntary termination upon receiving a default notice from a lender. After that, your right will be revoked. 

 

• Seek a time order from the court

A time order can allow you to stop your car dealer from repossessing the car. With this order you can request to change the interest rate if you are struggling to make payments on time. However, it is not plain sailing to qualify for this order. If you have made payments on time so far, you cannot apply for a time order.

• Talk to your car finance provider

Your lender can offer reduced payments or freeze payments for a certain time period. They would reassess your financial situation to know how much you can pay smoothly when you have other expenses to meet. 

Be careful while using your savings to pay your car. Savings should be used to meet unexpected expenses only. You will not be able to qualify for small loans like no guarantor loans for bad credit when you are already in debt. Make sure that your savings are kept safe for a rainy-day expense. 

Your car finance provider may not have a sympathetic ear. Do not panic; you should rather explore what options are available to you. Have clarity on your budget and explain your true financial situation to them. Repossession is expensive and a hassle, so there is likelihood that your lender will be ready to accept lower payments. 

The bottom line

At times it can be quite hard to stick to your car loan payments. You should immediately contact your lender to seek help from them. They may put you on a different repayment plan or accept reduce payments. Voluntary termination is the best option when you cannot make payments any more. 

After getting rid of your car, you will save a lot of money on:

• Fuel
• Interest payments
• Services
• Insurance
• Parking costs

The money you save can be utilised to settle non-priority debts. There is no denying that it will take a long time to settle your all accounts. 

It is always suggested that you do not borrow any other debt when you have a car loan. You should carefully understand the implications of your debts on finances in months to come. 

Description:  You do not need to panic if you cannot afford your car finance payments. You should stop paying non-priority debts, seek a time order from the court, and apply for voluntary termination.