When you take out a loan or other type of finance on a car, you’ll no doubt expect to be able to make all the repayments. What happens if you cannot pay your car loan, though?
Sadly, this can and does happen, often due to a change in circumstances such as redundancy or ill health. An increase in other outgoings could also cause this.
If you can’t pay
If you are finding it difficult to pay your car loan, it is essential to take action as early as possible. If you get into arrears, this will have a detrimental effect on your credit score, which may mean you will struggle to obtain finance in the future - or at least be forced to pay higher interest rates.
The first thing to do is to talk to your lender. Doing this early means you have a better chance of being able to reach an agreement. They may allow you, for example, to pay less per month but over a longer time period - helping to ease the pressure on your finances.
You can also seek independent advice from a charity or debt advice organisation, which will provide expert guidance on the best course of action to take.
Can I just hand back the car?
Whether you will be permitted to return the car and end the agreement early depends on a number of factors. One is the type of finance agreement you have.
Personal contract plan
If you are leasing the car, it may seem as if you should simply be able to return it and owe nothing. However, this may not be the case. Ending the contract early could mean you are still liable for the full leasing costs as per the original agreement.
Speak to the provider in the first instance. They can advise on this, and may also be able to offer you an alternative, more affordable arrangement.
If you are buying the car via hire purchase, you may be able to return it. This applies if you have already paid half of the car’s total cost; it may also apply if you can settle the difference between what you have paid and half the car’s cost. The original agreement should state the full price, as well as what happens if you wish to return the car. It may be worth choosing to do this if you don’t need the car, or you can buy another for less than the cost of the remaining payments. Make sure you put any request to end the agreement in writing and keep a copy, to prevent any potential adverse effect on your credit score.
Personal contract purchase
As with hire purchase, you can return the car via ‘voluntary termination’ if you have paid half or more of the total price. You will not get any refund if you have paid off more than half of the cost. Alternatively, if you want to pay off the contract early, you need to request a ‘settlement figure’ from the finance provider.
If you have taken out a personal or fixed sum loan to buy the car, rather than one of the finance packages detailed above, what happens if you cannot pay may depend on whether the loan is secured or unsecured.
If it is secured, then the loan provider has a claim on the asset upon which the loan has been secured - the car. This is not the case with an unsecured loan. Either way, you need to advise the lender that you’re having problems as soon as possible - hopefully that way you can reach some sort of agreement.
If you would like further information or advice on this topic, don’t hesitate to contact our expert team.