What happens if you can't pay your car finance

Missing a car finance payment does not mean losing the car straight away. The lender will contact you after you miss one or two payments, and at that point it should discuss ways for you to catch up with payments and pay the arrears¹. If payments keep being missed, the picture changes: continuous non-payment can result in formal notices of arrears and, after three or four missed payments in a row, a default notice².

What happens next depends on the type of agreement and how much you have paid. Under hire purchase (HP) or conditional sale, the finance company can take the car back without going to court if you have paid less than a third of the agreement¹. Once you have paid half the total amount payable, you have a legal right to hand the car back and end the contract early, which is called voluntary termination³.

The most useful thing you can do is talk to the lender before it acts. Lenders are expected to provide support if you are struggling to make repayments, and if you miss a repayment, firms need to contact you to let you know and explain what this means⁴. Free, independent debt advice is available, and it does not cost anything⁵.

What happens when you miss a car finance payment

The first missed payment triggers contact, not repossession. The lender will contact you after you miss one or two payments and should discuss ways for you to catch up with payments and pay the arrears¹. Under the rules for deferred payment credit, if you miss a repayment, firms need to contact you to let you know and explain what this means, and lenders need to provide support if you are struggling to make repayments⁴.

If payments continue to be missed, the lender may issue a default notice, then take further action to collect the debt and recover the car, possibly using a debt collection agency or applying for a county court judgment (CCJ)¹. Continuous non-payment can result in formal notices of arrears and, after three or four missed payments in a row, a default notice².

The credit file consequences start with the first missed payment. The provider and credit reference agencies count a missed payment as exactly that, recorded on your credit file, and several missed payments put your account at risk of defaulting⁶. More broadly, failing to pay debts, whether secured or unsecured, can affect your credit rating⁷. Missing payments can also lead to extra charges and make it harder to get credit in the future⁸, and missed payments could affect your credit rating, making it more difficult to get credit in the future⁹.

A lender may charge a penalty fee, default your account or even take legal action if you miss a payment¹⁰. That is why the timing of your contact with the lender matters: the earlier you raise the problem, the more options remain open.

Talk to your lender early: the help it should offer

Contacting the lender before arrears build up is the step that keeps the most options available. Official guidance for borrowers in difficulty is to contact the lender immediately¹¹. The same principle applies once court action is threatened: before the court date, the route is to contact the lender directly or through an advice worker or your solicitor, to make a proposal to pay the instalments and pay off the arrears within a reasonable time, and to let them know if the house has been put up for sale or is planned to be sold shortly¹². Lenders also have their own duties: if a repayment is missed, firms need to contact the borrower to explain what this means, and lenders need to provide support where repayments are a struggle⁹.

Lenders have their own obligations. If you miss a repayment, firms need to contact you to let you know and explain what this means, and lenders need to provide support if you are struggling to make repayments⁴. The lender will contact you after you miss one or two payments and should discuss ways for you to catch up with payments and pay the arrears¹.

If you are getting help from a debt adviser, tell your lender¹³. Advisers can negotiate on your behalf, and some debt solutions require you to have taken advice first: in Scotland, you need to get advice from an approved money adviser before you can apply for some debt solutions¹⁴. A temporary repayment plan, where you make reduced payments for an agreed period, is one option, though making reduced payments towards a debt can impact your credit file and could make it hard for you to take out more credit¹⁵.

Voluntary termination: handing the car back once half is paid

Voluntary termination (VT) is a legal right under the Consumer Credit Act for HP or PCP agreements. You will need to have paid 50% of the total amount payable under the agreement, otherwise you will need to make up the difference if you want to hand the car back². If you have made at least half of your payments, you have a legal right to return the car and end a hire purchase contract early³.

There is a technical point that catches people out. You do not need to have actually paid the 50% to be able to terminate the agreement, only give notice in writing¹⁶. In practice, if you have paid less than half, you will owe the difference up to half the agreement, plus any arrears and reasonable charges if the car is damaged¹⁷. If the lender has not already terminated the agreement, you can voluntarily terminate at any time before the last payment is due¹⁷.

When you use VT, you give the car back and there are no further payments or penalties, and it will not hurt your credit score, so it is a relatively clean break². You will not get any payments you have made back¹. The finance company might attempt to add extra charges based on your car's mileage, especially if it exceeds what they expected, though if you have maintained your car well, they legally cannot impose such penalties².

Can the lender take the car back?

The answer depends on the agreement and how much you have paid. Under HP or conditional sale, the finance company can take the car back if you miss payments, and can do this without going to court if you have paid less than a third of the agreement¹. If you have paid less than a third, your lender can repossess the car if it is on a public road, or from any premises where you have given permission to enter¹⁷.

Under a lease or hire agreement, the finance company can take the car back if you miss payments¹. With a logbook loan, the position is different again: you can still use your vehicle, but the lender takes ownership of it from the start of the loan until it is paid back, and can take and sell the vehicle if you do not repay¹⁸. A logbook loan cannot be ended early¹.

A personal loan taken out to buy a car works differently. The loan provider cannot take the car back if you miss payments, because the car is not security for the loan¹. That does not make the debt disappear: the lender can still pursue the money through the usual routes, including debt collection and court action.

Selling the car or settling the finance early

Selling a car that still has finance on it is not straightforward, and in most cases it is not allowed. It is against the law to sell it until you pay off the finance in full²⁰. You cannot sell a car on PCP as it does not belong to you¹, and you cannot sell a car under a lease or hire agreement¹. With a logbook loan, you cannot sell the car while the loan is outstanding¹.

The reason is ownership. With hire purchase, PCP and conditional sale, the vehicle is not fully owned by you until you have made the last payment to the finance agreement²¹. As one lender puts it, you may not own the car until the end of your agreement²², or not until the end, or after an optional final payment²³.

Settling early is possible on most agreements, but check the terms. You cannot use a credit card to pay off a loan²⁴. Some promotional offers are lost if you settle early: with one Lloyds Bank car finance offer, you lose eligibility if you settle your agreement in full before making your first scheduled repayment²⁵. If you are considering settling rather than terminating, the two routes have different costs and different effects on your credit file, so it is worth comparing them directly.

What happens if the car is repossessed and sold for less than I owe

Repossession does not wipe the debt. If the car sells for less than what you owe, you will be liable for that shortfall². The lender sells the vehicle to recover what it is owed, and any gap between the sale price and the outstanding balance remains owed by you.

This is the same principle that applies to other secured lending. When a property is repossessed, it is usually sold as quickly as possible, often for less than the market value, meaning you would owe the bank even more than you would have if you had sold the property yourself²⁶. The same logic applies to a car: a forced sale tends to raise less than a sale you control.

The shortfall is a debt in its own right, and the lender can pursue it through debt collection, and potentially through the courts. If you are dealing with a shortfall alongside other debts, free advice services can help you work out what to do⁵. If you are in Scotland, there are free advice services that can help²⁷, and in Wales, missed payments could affect your credit rating, making it more difficult to get credit in the future⁹.

Is PCP treated differently from hire purchase if you can't pay?

The repossession and voluntary termination rules are broadly the same for both, because both are regulated credit agreements where the car secures the debt. The difference is in how the payments work and what happens at the end.

With PCP, you might pay an initial deposit and make monthly payments much like HP, but these are typically lower because you are only financing a part of the car's value. At the end of the term, you can either return the car, pay a final payment to keep it, or trade it in². With HP, the vehicle is not fully owned by you until you have made the last payment to the finance agreement²¹.

The practical consequence if you cannot pay is that PCP and HP both expose you to repossession if you have paid less than a third, and both give you the voluntary termination right at half the total amount payable¹. The lower monthly cost of PCP does not change the underlying security: the car can still be taken back.

Free debt advice and complaints to the Financial Ombudsman

Free help exists and it does not cost anything. There are free advice services that can help²⁷, and if you want to speak to someone about your debts you can get free, confidential and independent advice from a debt adviser²⁸. In Scotland, you need to get advice from an approved money adviser first before you can apply for some debt solutions¹⁴. Some charities also run helplines that can provide details of both national and local debt advice services, and may put families in touch with a specialist debt counselling service for families with disabled children⁵.

If the lender is not helping, you can escalate. If you are not getting help from the credit card company or the car finance provider, you can take your case to the free Financial Ombudsman Service²⁹. The ombudsman can help if you have made a complaint to the financial business and you are not happy with their answer³⁰. It sees complaints about unaffordable lending across a range of credit products, from car finance to payday lending³¹.

The ombudsman deals with common complaints including not being the person who owes the debt, an incorrect amount, repeated contact, unhelpful treatment in financial difficulty, and debt that is not enforceable³². It can also help with complaints about bank accounts and bank cards, insurance for your home, car or travel, and problems with loans³⁰. If you are unhappy with a claims company, for example the results of your claim or the fees they have charged you, you can complain to the Financial Ombudsman Service about that too³³.

If you are dealing with a lender that is not licensed, or you have borrowed from an illegal money lender, there is separate help available¹⁹. If you owe money to HMRC as well as car finance, there is guidance on what to do²⁸.