When you’re in an IVA, it’s normal to worry about the effect it could have on an any existing credit agreements you have, such as a car finance agreement. Or, if you’ve been thinking about getting a car finance agreement, you may be wondering if it could stop you from qualifying.
Being in a formal debt solution may mean you have to make changes to your usual spending habits and stick to a tighter budget, but it doesn’t mean you should have to give up items that are necessary to live or work, like a car.
What is an IVA?
An Individual Voluntary Arrangement – sometimes called an Individual Voluntary Agreement – is a legally binding agreement between you and your creditors (the individuals or companies you owe money to) to repay your debts through a series of affordable monthly payments.
During an IVA – which typically lasts between five and six years – all interest and charges will be frozen and your creditors will be instructed to stop contacting you about the debt.
Because an IVA is legally binding, it can only be set up and managed by an Insolvency Practitioner (IP) who will distribute your monthly payments among your creditors and communicate with them on your behalf.
Once you’ve made your final payment, any remaining debt will be written off and you’ll be free to get on with your life. The amount you’ll be expected to repay over the course of your IVA can differ but, in most cases, it will be a minimum of 25% of your total debt.
How much debt do you have?
What is car finance?
In the UK, car finance is the most popular way to purchase a new or used car. But what is it and how does it work? Put simply, car finance is the general term given to a range of options that allow you to pay for a car in regular instalments instead of upfront.
Typically, car finance is used when someone wants to purchase a car but can’t afford to pay the full asking price. There are different types of car finance but most work by borrowing money to cover the initial cost of purchasing the car and repaying the amount borrowed over time through a series of regular instalments.
The average car finance term lasts between 12 months (a year) and 60 months (five years), after which time you can choose to repay your outstanding balance and take full ownership of the car or return it to the dealership.
What are the different types of car finance?
There are various types of car finance, each with their own advantages and disadvantages. Here is a quick guide to main types of car finance available in the UK:
Hire Purchase (HP)
Typically, a HP agreement involves putting down a deposit (usually 10% of the car’s value) and paying the remaining 90% in monthly instalments over a period of 12 to 60 months.
When you enter a HP agreement, the debt is secured against the car. This means that, if you stop making payments, the HP company can take the car from you and sell it to make up for the money owed.
Once you’ve made your final payment, you will own the car outright and will be free to do whatever you please with it, whether you want to continue using it or sell it.
Personal Contract Purchase (PCP)
Personal Contract Purchase is one of the newest and most popular forms of car finance, but it is also one of the most complicated to understand. With a PCP agreement, you put down a deposit (usually 10% of the car’s value) and borrow the rest, making monthly payments to cover the interest and depreciation.
The total amount due over the course of a PCP agreement is the difference between the car’s value at the start of the term and how much it’s predicted to be worth when the contract comes to an end.
Most PCP terms last between 24 and 48 months. Once your final payment has been made, you’ll have the option of handing the car back or paying a ‘balloon payment’ to cover the remaining balance.
Personal loan
Perhaps the simplest type of car finance, a personal loan provides you with enough money to purchase a car outright before repaying the amount borrowed over a set period – usually at a fixed interest rate.
Unlike HP and PCP agreements, personal loans are unsecured. This essentially means the car can’t be taken away from you and sold if you don’t keep up with your repayments.
However, because unsecured debt carries more risk for the lender in the event you don’t pay, personal loans tend to require a good credit score. Generally, the better your credit score, the better interest rates and loan terms you can access.
Personal Contract Hire (PCH)
PCH is when you lease a car on a long-term basis with no option to own it at the end of the agreement. Once your final payment has been made, the car will simply be returned to the lender.
Because there is no payment required at the end of your term, your monthly payments are likely to be among the lowest of all car finance options and you can hand the car back without any financial obligations.
PCH can be an attractive option for those who like to get a new car every few years or drive a more expensive model that they never would have been able to afford upfront.
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Can I get car finance with an IVA?
During an IVA, you must stick to certain spending restrictions to ensure your arrangement is a success. One of these rules is not being able to borrow more than £500 without the approval of your IP.
When you contact your IP, they will review your income and expenses and decide whether car finance is a good idea for your financial situation at this time.
There is no reason why your IP should refuse your request for car finance if it aligns with your budget and living costs, but because the majority of your disposable income will be paid into your IVA, you may find that you have little money left over for monthly car finance payments.
Being in an IVA will also limit your options when it comes to getting car finance because your arrangement will be visible on your credit report. So even if your IP approves, you may still find it difficult to get a lender to agree to enter into a car finance agreement with you.
What car finance options are available with an IVA?
Being in an IVA doesn’t mean you can’t access car finance, but your options may be limited.
For example, if your IVA lasts five years, it will remain on your credit file for another 12 months and the public register for another three months after you’ve made your final payment. So unless you need a car immediately, waiting until your IVA is removed can greatly improve your chances of being approved.
However, like most forms of credit, some specialist lenders provide car finance loans designed for people with poor credit, such as those with IVAs. These companies may carry out a soft credit check to confirm your financial situation, but this won’t affect your credit score or cause it to decrease any further.
Remember, if you’re in an IVA, car finance is usually only possible if your IP has given you the go-ahead. They may agree if you can prove you can afford the monthly payments, but also have every right to refuse on the grounds that your IVA should take priority over any other credit agreement.
Can I keep my HP car when I enter an IVA?
Unlike other debt solutions that require you to give up your assets before your arrangement starts, your HP car will be protected during an IVA because it’s technically not yours until you’ve made your final payment.
However, you may need to prove that your car is necessary for work or family reasons and isn’t of excessive value. For cars over a certain value, you may be asked why it is necessary and why you can’t replace it with a more modest vehicle with cheaper monthly payments.
Because most IVAs last five years, it’s likely that your HP agreement will come to an end at some point during this time. When this happens, the money you were paying towards it must be added to your IVA. For example, if your IVA was £150 a month and your HP agreement was £120 a month, your IVA payments will increase to £270 a month.
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How long should I wait to access Hire Purchase car finance after an IVA?
There is no set time you must wait before you can access car finance after an IVA, but most people wait until an IVA has been removed from their credit report and their credit score has improved.
When your IVA has been removed from your credit file, your credit score will naturally improve and you should find it easier to get a car finance loan with favourable terms.
There are several steps you can take to give your credit score a boost after your IVA comes to an end, such as making payments in full and on time, registering to vote, and checking your credit report for errors.
I need a car immediately after my IVA has finished. What are my options?
Depending on your financial situation, waiting another 12 months after your IVA ends for it to be removed from your credit file may not be a viable option.
There is nothing stopping you from applying for car finance immediately after an IVA, but you may be limited when it comes to the car finance options available to you. Having a poor credit history can be an automatic barrier to accessing most forms of credit and will limit the types of car finance you are eligible for.
For example, while you may be able to access car finance, you may not be in a position to benefit from the best deals. Even if a lender agrees to give you car finance, you’ll usually be subject to stricter terms to cover them in the event you can’t pay.
Because of this, your best chance of getting car finance immediately after an IVA is likely to be with a a specialist lender who has experience in helping individuals with poor credit access the best car finance deals for their budget.
Conclusion
Car finance is an increasingly popular way to finance a car in the UK, but it is possible when you have an IVA? There are various types of car finance available, each with their own advantages and disadvantages, and the the right option for you will depend on your financial situation.
During an IVA, your disposable income will be significantly reduced and any money left over after your living costs have been taken care of will be expected to be paid into your arrangement. However, you may be able to access an affordable car finance deal with a specialist lender while your IVA is still visible on your credit file if you can prove you can afford the repayments.
When it comes to getting car finance with an IVA, always do your research and ensure you know exactly what you’re signing up for. Whether you’re considering a Personal Contract Purchase or a Hire Purchase agreement, having a good understanding of the various terms, fees, and interest rates involved can help you make an informed decision.
