Navigating the complexities of personal finance can be a daunting task, especially when you have a Debt Relief Order (DRO) registered in your financial history.
This concern often raises the question: can you secure car finance when you have a DRO?
This article aims to shed light on this issue, exploring potential challenges and possible solutions, whilst offering a comprehensive understanding of how a DRO impacts your financial opportunities
Understanding Debt Relief Orders
A Debt Relief Order is a financial tool exclusively available in the United Kingdom. Designed to provide respite to individuals unable to repay their debts, a DRO temporarily halts creditors from pursuing owed amounts, offering individuals a grace period to regain their financial footing.
The process of securing a DRO involves a detailed assessment of your financial circumstances, typically carried out by an approved intermediary, such as a skilled debt adviser.
This form of debt management is generally seen as a last resort for people with minimal assets and low income.
When a DRO is approved, it remains in effect for one year, during which creditors cannot demand repayment.
After this period, if your financial situation hasn’t significantly improved, the debts included in the DRO will be written off.
However, while beneficial in the short term, a DRO can have long-term implications on your creditworthiness.
For instance, a DRO is recorded on your credit file for six years from the date it was issued, which can affect your ability to secure credit or finance in the future.
Impact of a Debt Relief Order on your Credit Rating
Your credit rating is a measure of your creditworthiness—essentially, it indicates how likely you are to repay borrowed money.
A DRO, unfortunately, has a significantly negative impact on your credit rating. As mentioned earlier, it remains on your credit file for six years, during which time potential lenders can view it.
This information can make lenders see you as a high-risk borrower, which can adversely affect your ability to secure car finance, as well as other forms of credit.
Furthermore, your credit rating can be affected by missed or late payments, high levels of existing debt, and the frequency of your credit applications, among other factors.
A poor credit rating can make it difficult to secure competitive interest rates on loans, get approved for credit cards, or even pass tenant checks.
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Car Finance Options Available to Individuals with a DRO
Despite the challenges posed by a poor credit rating following a DRO, there are still car finance options that may be available to you.
These include Hire Purchase (HP), Personal Contract Purchase (PCP), and personal loans.
Under HP, you pay a deposit and then make monthly payments to ‘hire’ the car.
Once the final payment is made, the car becomes yours. PCP is similar, but your monthly payments only cover the car’s depreciation.
At the end of the term, you can make a ‘balloon payment’ to own the car, return the car, or use any equity towards a new car.
However, obtaining these types of car finance with a DRO in your credit history can be more challenging.
Lenders may require a higher deposit, charge higher interest rates due to the increased risk, or require a guarantor for the loan.
Challenges in Securing Car Finance with a Debt Relief Order
Securing car finance with a DRO can be difficult, primarily due to the negative impact a DRO has on your credit rating.
One of the primary challenges is the likelihood of being charged higher interest rates. Since lenders consider individuals with a DRO as
high-risk borrowers, they often offset this risk by charging higher interest rates, making the finance less affordable.
Another challenge is that lenders might require a guarantor for the loan. A guarantor is someone who agrees to take over the loan repayments if you are unable to make them.
Finding a suitable guarantor can be challenging, as the guarantor needs to have a good credit rating and sufficient income to cover the loan repayments if necessary.
Additionally, lenders may require a larger initial deposit to secure the car finance. This can be a significant barrier if you are still in a difficult financial situation.
These challenges, while substantial, are not insurmountable and there are strategies you can employ to improve your chances of securing car finance.
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Steps to Improve Your Chances of Getting Car Finance Post-DRO
Although a DRO can negatively impact your credit rating, there are ways to improve it over time.
Maintaining regular, on-time payments on any existing credit can demonstrate to potential lenders that you can manage your finances responsibly.
In addition, minimising your use of credit and gradually reducing any outstanding debts can also have a positive effect on your credit rating.
It’s also recommended to space out your credit applications, as numerous applications in a short period can indicate financial distress.
It’s also worth checking your credit report regularly. This allows you to monitor your financial progress and correct any inaccuracies that could be affecting your credit score negatively.
Financial planning and responsible debt management can also increase your chances of securing car finance.
This might involve setting a realistic budget, building up savings, and seeking advice from financial advisors or debt counsellors.
Alternatives to Traditional Car Finance for Those with a DRO
For those who find it challenging to secure traditional car finance due to a DRO, alternative financing options are available.
Peer-to-peer lending platforms can be an option. These platforms connect borrowers with individual lenders, who may be more willing to consider your individual circumstances rather than just your credit history.
Credit unions are another potential source of car finance. As not-for-profit organisations, credit unions often offer competitive rates and may be more willing to lend to individuals who have a DRO.
Borrowing from family or friends is another option. This can provide a low-cost and flexible way to finance a car. However, it’s important to treat these arrangements as formally as any other loan to avoid misunderstandings or damage to your relationships.
While these alternatives may offer solutions, they also come with their own risks and should be considered carefully.
Conclusion
While obtaining car finance with a DRO can be challenging, it’s not impossible.
With careful planning and proactive financial management, it’s possible to rebuild your credit rating and improve your chances of securing car finance.
Exploring all available finance options, both traditional and alternative, can also open doors to possible solutions.
Remember, a DRO doesn’t define your financial future; it’s merely a stepping stone towards better financial health.
With determination and patience, you can navigate the path towards achieving your financial goals, including securing car finance.
Where can I get get advice on a DRO, Debt Management Plan, or other debt solutions?
Whether you’re struggling with rent arrears that are piling up, or the local authority are pressuring you over money owed in council tax, outstanding debt can have a significant impact on your mental wellbeing and your quality of life.
That’s where we can help. Carrington Dean are Scotland’s debt specialists.
We offer people debt advice to help them improve their financial circumstances, and can even help you decide whether formal debt solutions like DROs and Debt Management Plans would be suitable for you.
For reliable debt advice from fully-trained debt specialists, get in touch with Carrington Dean today on 0800 043 1320.
