How Will An IVA Affect Your Car Finance?

There can be some uncertainty about whether or not Individual Voluntary Arrangements (IVA) have an impact on car finance agreements. Below we cover a range of scenarios, allowing you to understand how an IVA can affect you before, during and after a car finance agreement starts and ends.

Starting an IVA during a car finance agreement

Car Keys

Hire purchase (HP), Personal Contract Purchase (PCP) and leasing car contracts do not give you full ownership of the car while paying the agreed instalments. These are secured debts that cannot be included in your IVA, so if the car is viewed as essential by the Insolvency Practitioner (IP) managing your case, it could mean you are permitted to include this in your living expenses budget.

However, if the repayment amounts are higher than those being offered to your IVA, this may be reviewed by the IP.

Also bear in mind that if you have an HP car finance contract and this ends during an IVA, you may be asked to sell the car as you will now be the owner and it could be viewed as a valuable asset that can be used to settle creditor debts.   

Some car finance contracts may also feature a clause that will allow them to terminate your agreement if you enter into an IVA or seek bankruptcy. Whether or not the lender will evoke this option will vary on a case-to-case basis, even if you are able to maintain monthly payments. Be sure to read the contract to check if this is the case and contact the lender if you are unsure.

At the end of a PCP or lease contract you are not technically the owner as you need to make one final large sum payment to own the car (known as a balloon payment). The options available here include:

  • Refinancing the car with the current lender – although your current credit status may make it difficult to do so.
  • Pay the balloon payment with help from a partner or relative, although the IP will make the final decision as to whether this is acceptable or not.

Getting car finance during an IVA

Car Finance IVA

After signing up for an IVA, securing any form of credit worth more than £500 will require you to seek permission from your IP. Car finance deals will always be worth more than this amount, which means you will have to ask for their approval. It is important to note that not gaining permission may breach the terms of your IVA which could lead to its termination.

The IP will assess your request based on your current situation, reviewing your income and expenditure. IVAs take into account the amount of disposable income you have available to pay off existing debts, which could mean you find it difficult to raise enough funds to pay for the car finance monthly instalments.

You may also not be eligible for a number of car finance deals if you are involved with an IVA. This is because IVAs are recorded on the Insolvency Register which will also mean they appear on your credit file, lowering your score. Finance lenders running standard credit checks during the application process will be aware of this and some may be more cautious to give you credit as a result.

What are my options?

While some car finance companies may not be willing to provide you with credit, there are others available that can offer deals to people with poor credit histories. Before agreeing to any terms offered by these companies it is important to carry out your research and ensure you are able to afford the repayment plan, as the interest rates can be very high.

It is also worth assessing if you can manage without a car for the time being. This will be different for everyone, depending on your private and professional requirements. Using public transport, cycling or sharing the use of someone else’s car could be a more cost-effective alternative. It may also allow you put money aside to purchase a car outright in the near future.

If purchasing a brand new car is too costly, you can try searching online to find reputable used car providers as a cheaper alternative. If applying for a car finance deal is the only way you feel you will be able to purchase a vehicle, you will find that many dealers also offer second cars. As with any credit you wish to apply for, be fully aware of the total amount that needs to be repaid, along with additional fees and missed payment penalties mentioned in the contract.

Car finance companies typically carry out two different types of credit checks. When you first make an application they will perform a ‘soft check’ that will not be recorded on your credit file. If you pass this stage and wish to proceed with one of the offers presented to you, a ‘hard check’ will be carried out, which involves reviewing your credit history and verifying income/outgoings. Whether your application is accepted or rejected, this will be recorded on your credit file and can affect your overall score.

Getting car finance after an IVA

Car Purchase

If you wish to wait until your IVA has been completed before applying for car finance there are some important things to remember. While you will be removed from the Insolvency Register once the IVA is complete, it will remain on your credit file for a total of six years from the moment the agreement started. How long it will remain on your credit file after you complete your IVA depends on the duration of the agreement.

Having a record of an IVA on your credit file can have a detrimental effect on your credit score. This means that while you no longer have to seek permission to apply for credit, you may find it more challenging to find a lender willing to accept your application. Some people find it is helpful to rebuild their credit score before making an application, potentially increasing their chances of being accepted for a car finance deal and subsequently enjoying better terms.