Car finance in an IVA
Can I take out car finance whilst in an IVA?
One common question that we often receive from clients in an IVA is whether or not they can purchase a car on finance or can they take out finance to address a balloon payment when a PCP agreement ends.
In the UK each year, over a million cars are being bought on finance. However, individuals in an IVA can find accessing affordable finance to be a difficult problem, due to problems and limits accessing credit. However, finding a finance package to suit you is not impossible!
What kind of finance options are available to me?
Hire Purchase (HP)
Hire purchase (HP) is one of the most common ways to purchase a car. With a HP deal you are often required to pay monthly payments to repay the balance of the price of the car plus interest over a period of time. It is a cost-effective way of financing a car if you wish to own it outright at the end of the agreement.
Personal Contract Purchase (PCP)
Personal Contract Purchase (PCP) usually requires you to make an initial deposit.
What makes PCP that bit different is that monthly payments are usually at a lower cost, however, when you get to the end of your agreement, there is a final payment, referred to as a balloon payment that must be made if you wish to keep the car.
Once your agreement is finished, you’ll have three options;
- Purchase the car by paying the final balloon payment
- Hand the car back
- Part exchange for a new car
Before signing up to any finance agreement be sure to research all your options to ensure you get the best deal for you.
Car finance during an IVA
During an IVA will need permission from your Insolvency Practitioner (IP) to obtain any credit greater than £500, unless it is for public utilities such as gas, electric and water etc. Not complying with this means you may breach the terms of your IVA and ultimately could result in its failure (for for information on how and why your IVA can fail, read our blog 'IVA Failure'.
This means that in order to take out finance on a car, you will be required to get approval from your IP. You will need to justify to your IP why you require a finance deal on a car; perhaps public transport is costing too much each month and a car on finance would be the cheaper option, some people may require a car to commute to and from work in order to make a living or maybe you require a car to get the children safely to school. Your IP will decide whether or not this request is reasonable based on your circumstances and they will take into consideration your income and expenditure to ascertain whether or not committing to a car finance loan is manageable given your budget. However, since an IVA involves paying a significant proportion of your disposable income towards settling your debts, you may find you are not left with enough for monthly car payments.
Being in an IVA will also limit the car finance programmes which you are eligible for. IVAs are a type of formal insolvency and are considered public information and will be listed on the Insolvency Register, therefore the concept of debt will be no secret from any potential creditors. Because of this, an IVA will also appear on your credit file, indicating to lenders that you have had trouble managing credit in the past. This will lower your credit score and make lenders more cautious when it comes to providing you with credit. If you would like to know more about your credit score during an IVA, read our Credit Score blog.
There are companies out there which provide customers with poor credit scores, or histories of struggling to manage with debt, with loans.
It is important to be cautious when approaching companies like these, however, as borrowing money when you have a poor credit history can be very expensive.
Car finance after an IVA
Details of your IVA will remain on the Insolvency Register for the duration of your IVA and will be removed three months after your IVA has come to an end. However, a record of your IVA will remain on your credit file for six years from the date your IVA commences. After the six-year mark has passed your IVA will no longer be listed on your credit report. Unfortunately, this does not mean it’s all plain sailing from here on out, this does not mean that you will be accepted for all credits that you apply for, you must now work on repairing your credit score and building it up. You can visit out blog on Credit Scores to see how you can repair and improve your credit score! Patience is key in this situation and it is often better to wait until your credit score has improved before applying for finance in order to make use of the best deals there are available. Understandably there are circumstances in which you simply can’t wait, just be sure to contact a variety of lenders to ensure you do get the best deal possible.
Before you make any decisions about taking out car finance, be sure to speak to your Insolvency Practitioner. Taking out finance without first consulting your IP would result in your IVA being breached and could possibly result in IVA failure.
If you require any further advice or have any queries in regards to your IVA/taking out an IVA with us, contact us on 0333 939 7920 and speak to a member of our team.