Can I get Car Finance With a Debt Relief Order?
Many people use Car Finance to buy their vehicles. Car Finance is the term used to describe a wide variety of secured loan agreements that can help you buy your car. You might have a Hire Purchasing Agreement, for example, which allows you to pay off the cost of a car in monthly payments while you use it. The car does not become yours until the entire cost is paid off.
As you might expect, car finance is a major concern for many people in debt. As it is a secured debt, non-payment can result in repossession. It also becomes a major concern for people considering various debt solution options. One such debt solution is the Debt Relief Order (DRO), which freezes your debt for 12 months if they are less than £20,000 and you can prove that your surplus income is currently insufficient to repay your debts. If your ability to repay your debt does not improve in those 12 months, your debt is written off. Eligibility criteria and restrictions can limit the amount of people the DRO is able to help, and this includes the issue of car finance.
You Existing Car Finance Deal
Home owners are one group who are completely ineligible to apply for a DRO because the DRO is not intended for anyone who has a significant amount of equity. Equity is the amount of money you would make if you were to sell an asset, taking into account tax and costs associated with selling.
Car owners, however, have a different relationship with the DRO. Because so many cars are essential for people’s travel to work and other daily activities, you are allowed to own a car when you apply for a DRO. However, this car must be worth less than £1,000. The value of your car is usually determined by your adviser, but if their valuation proves the car is worth more than this, you can contest this by providing two valuations of your own. These must be from independent, trustworthy motor dealers.
Notably, you don’t have to worry if your car is important for you or a loved one with a disability as the DRO does not count any vehicle which has been modified to suit the needs of a physical disability. The cost of such a vehicle is deemed irrelevant, so you may keep it and still apply for a DRO, regardless of it’s value.
But how do you assess the value of a car that you are using as part of a hire purchase agreement? Legally, you do not own it yet, but it may be worth considerably more than £1,000. There are some important issues to consider with an HP agreement and a DRO.
- The HP agreement can be included as a debt in your DRO. This means your payments and interest would be frozen, you won’t be expected to pay the debt, and it could be written off after 12 months, should you financial circumstances remain the same.
- If your vehicle is worth more than £1000, it is likely that your monthly payments towards the car will not be viewed as an allowable expense. They will not be considered as part of your expenditure and will not be used to calculate your surplus income. The DRO limits your surplus income at £50. Unfortunately, this might mean either:
- Leaving out your HP agreement as expenditure could invalidate you from getting a DRO as your surplus income may be calculated as being greater than £50
- If your surplus income is less than £50, even without the inclusion of the HP agreement payments, you then have less than £50 to keep up with those payments. Failure to pay may result in repossession.
- While it may be possible to leave a HP agreement out of a DRO as demonstrated above, if you have any HP agreement arrears, this will not be possible. If your DRO ends without your circumstances changing, your HP agreement is written off like your other debts. This may mean your car is repossessed.
- Some HP agreements specifically bar you entering into an insolvency agreement. It is important to check your contract to ensure that you aren’t breaking it.
- Occasionally, it may be acceptable for a third party to take over the HP agreement payments. Do not undertake this without seeking the help and advice of an advisor. If you act without their consent, you could be accused of prioritising one debt above another and your DRO may be rejected. At worst, you may even face a fine or jail time
- You should also keep the date of the end of your HP agreement in mind. If your agreement ends before your DRO ends and the car is worth more than £1000, it will force your DRO to become revoked as you will no longer be eligible.
- The good news is that reasonable transport costs associated with your car are included in calculating your expenses. This means your MOT, insurance, tax and petrol costs could all potentially be used to calculate your surplus income.
New Car Finance Deals and Your DRO
If you are in a DRO and want to enter into a new car finance agreement, the answer is more simple. While it is not explicitly banned, it is not advisable and there are many restrictions that may stop you from being able to enter into a DRO.
- Your credit score is likely to be poor, so any HP agreements you enter into will have high interest rates which you cannot afford or require a large deposit which you do not have
- Having a surplus income of only £50 will severely limit your ability to fund a new HP agreement or other car finance scheme.
- The DRO does not allow you to take out credit worth more than £500 without first consulting with and gaining permission from your adviser, and disclosing the existence of your DRO to your potential lender.
Nonetheless, we understand that sometimes life throws you a curve ball. What if a car which is essential for your job breaks down while you have a DRO? Our best advice is to discuss the specific situation with your DRO adviser. They should be able to advise you, and may suggest you look for a second-hand car worth less than £500.
But remember, a new debt cannot be added to the DRO so you will be entirely responsible for repaying it, even if your DRO is later unsuccessful, and your old debts are unfrozen. Seek advice regardless, or you might get into further financial trouble, and always remember not to agree to anything that would tie you to payments greater than your surplus income.
It is best to wait until after your DRO to assess your new financial position before seeking car finance. If you want to start working towards it immediately, you can try saving your surplus income to make the beginnings of a deposit.