We look at the costs, plus the benefits and disadvantages of buying cars using hire-purchase agreements.
With the country in the state it is, for the foreseeable future we’re going to see a rise in the number of people seeking advice from our excellent Dealing with Debt discussion board.
Recently, one Fool user pointed out to us at Fool HQ that many debtors in distress are having trouble with hire-purchase agreements on cars. If you’re considering such an agreement, or have one already along with debt problems, here’s what you need to know.
These schemes aren’t cheap
Just like if you finance your car through the dealer, when you use hire purchase to finance your new car it is often very expensive compared to getting an ordinary personal loan from a separate provider. To compare the total cost, ask for the ‘total amount repayable’ figure, and get similar comparisons with your personal-loan search.
You don’t own the car yet
Hopefully you realise that with this agreement you are only hiring the car until you have made your final payment. The only benefits to this are small and probably won’t be of use to you. They are:
- You can return the car once you’ve paid half the cost and can stop making further payments.
- If the car is faulty and you act swiftly enough, you can pursue the company that financed the agreement (i.e. the one that paid for the car and to which you make the repayments). This is in addition to your usual route of pursuing the dealer.
The negative aspect of not owning the car is bigger. If you haven’t yet paid 1/3 of the cost and you default on a payment, the finance company can simply turn up and take back their car if you’ve parked it on the road (but not from your drive or garage, although car parks are grey areas). What’s more, many agreements will still require you to pay up to 1/2 of the cost of the vehicle, whether you have it in your possession or not.
If you’ve paid more than 1/3 the finance company must get a Return Order from the court before they are allowed to take the vehicle back.
Finally, as it’s not your car it can’t be protected if you’re made bankrupt.
What can you do?
Here are some tips.
1. As I’ve explained, the finance company can take your car back. However, if you keep your car on private property, such as your drive or a locked garage, the company must first get a court order to do so. This is regardless of how little you’ve paid. I would certainly keep it in a garage if possible.
2. Work out if you’ve paid 1/3. Take into account the deposit you paid and the value of any part-exchange. If the finance company takes your car without a court order or your consent, and you’ve paid over a third, you should get a refund of all the money you’ve paid in the agreement.
3. Decide if you can you do without the car. Bearing in mind that you’re struggling with your bills, would it make more financial sense to give it up and get a cheap, reliable 2nd-hand car? (Remember, though, that you’ll probably still be obliged to pay up to half, if you haven’t already done so.)
4. If you can’t do without the car, make it a priority debt and pay less to other debts such as unsecured personal loans. However, don’t forget your other priority debts:
- Council tax (people go to prison for not paying their council tax)
- Electricity and gas (don't get cut off)
- Maintenance, child support and fines (to avoid going to prison)
- Income tax
- Rent or mortgage (to avoid losing the roof over your head)
- Second mortgage (same reason)
- Television licence
5. Before the court issues a Return Order, you will receive claim forms and will have the opportunity to plead your case in court. If you can offer a repayment plan that pays off the debt in a reasonable period, as well as the ongoing monthly payments, the court is likely to refuse the finance company’s Return Order.
6. Always try to negotiate with the finance company first to make a plan to pay off the debt. It’s not often that they’ll let you pay less per month than the monthly payment was supposed to be, but it can happen.
7. Failing that, you can apply for a Time Order from the court. You use this when you’re having temporary difficulties. The judge can agree that you pay reduced payments for a short while and can increase the length of the contract.
8. Dealing with debt can be crushing and debilitating, but you don’t have to handle it alone. For further guidance on court procedure, try our Legal Issues discussion board. For a shoulder to lean on, try the Comfort Café. Certainly don’t overlook the great guidance in Dealing with Debt.
> Compare unsecured personal loans.
> Read How To Get Out Of Debt.
