Car finance arrears: what happens, and what you can actually do
Whether car finance is a priority debt depends entirely on the agreement type, and most people do not know which they have. Here is the escalation process in order, what your rights are, and how this debt is treated in each UK debt solution.
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Where this debt sits in the hierarchy
The consequence of not paying is losing something essential — your home, your supply, your goods, or in rare cases your liberty. Priority debts come before credit cards, loans, overdrafts and catalogues, however aggressive the letters from those creditors are.
What actually happens, in order
Missed payment
Arrears notices are issued under the Consumer Credit Act.
Default notice
You are given at least 14 days to remedy the arrears.
One third rule
Under HP or PCP, once you have paid a third of the total amount payable, the lender needs a court order to repossess. Below that threshold it may repossess from a public place without one.
Voluntary termination
Once you have paid half the total amount payable you have a statutory right to end an HP or PCP agreement and return the car, subject to condition and mileage.
Shortfall
After sale at auction, any shortfall remains due as an unsecured debt.
What people are not usually told
The one-third and one-half rules are statutory rights under the Consumer Credit Act 1974 and they are worth real money. Work out exactly what you have paid against the total amount payable in the agreement before you speak to the lender. Voluntary termination in particular is frequently discouraged by finance companies but is your legal right, and it caps your liability where the car is worth less than the outstanding balance.
How this debt is treated in each solution
Every formal solution handles debts differently, and this one is no exception.
| IVA | DMP | DRO | Bankruptcy | |
|---|---|---|---|---|
| Formal insolvency | Yes | No | Yes | Yes |
| Where it applies | England, Wales and Northern Ireland | The whole of the UK | England and Wales (Northern Ireland has its own version with different thresholds) | England, Wales and Northern Ireland (Scotland calls it sequestration) |
| Typical duration | 60 months, or 72 with home equity | Until the debt is repaid — no fixed end | 12 months | Discharged in 12 months; payments up to 3 years |
| Monthly payments | Monthly, affordability-based | Monthly, flexible, changeable | No payments at all | Only if you have surplus income |
| Your home | Excluded; equity sets the term | Not affected | Not available to homeowners | May be sold |
| Credit file impact | 6 years from the start date | Defaults recorded, 6 years each | 6 years from the order date | 6 years from the order |
| Public register | Listed on the public Individual Insolvency Register, which anyone can search. Your address can be withheld only on evidenced safety grounds. | Nothing public. A DMP is a private arrangement. | Listed on the public Individual Insolvency Register. | Listed on the public Individual Insolvency Register, and in some cases advertised more widely. |
| Fees | Paid from your monthly payments | Free providers available | Free — no application fee | £680 application fee |
| Creditor protection | Legally binding on included creditors | None — entirely voluntary | Full protection, then write-off | Full protection, then discharge |
Arrears existing at the start date can usually be included in a formal solution. Ongoing liabilities — this year's council tax, current rent, current energy usage — cannot be, and must be budgeted for separately.
Not sure which of these applies to you?
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Common questions
Can they take my car if I've paid more than a third?
Not without a court order, under a hire purchase or PCP agreement. If they take it without one, the agreement is terminated and you may be entitled to recover everything you have paid. If a lender is threatening repossession and you are past the one-third point, say so in writing and get advice.
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