Can't afford car payments? Your options explained

Don't get into financial difficulties: several options are available if your circumstances change and you can no longer afford car payments

BuyaCar team
Apr 1, 2020

It’s impossible to predict what’s going to happen tomorrow, let alone over the three to four years of a typical car finance agreement.

People's circumstances often change - especially when significant events such as pandemics occur - and you may find that you're no longer in a position to afford your car payments.

In this case, it’s vital to take action quickly and speak to the finance company, as it may be possible to work out an affordable arrangement. Don’t leave it to the last minute or start to miss your payments, or you could find it difficult and expensive to borrow money in the future.

It’s especially important to speak with your lender if you are leasing your car on a Personal Contract Hire plan. As this is a long-term rental contract that you'll have committed to, you are in their hands and it may be difficult - and costly - to adjust your payments or end the contract early.

You’ll have more options with Personal Contract Purchase (PCP) or Hire Purchase (HP). These are finance agreements, which are more flexible, potentially enabling you to cut your monthly payments, swap your current car for a cheaper one, or give up your vehicle altogether.

The options open to you will depend on your current car, the outstanding amount of finance and your financial situation. We’ve listed some of the common choices below.

Refinance for more affordable car payments

It might be possible to refinance a PCP or HP agreement at a lower interest rate, or over a longer term, which could cut your monthly payments. Be aware, however, that simply lengthening the contract would leave you paying more in the long run for the same car, as interest mounts up over a greater period.

To do this, you’ll need a settlement fee from your lender, which is the amount of money required to buy the car immediately and end your finance agreement. 

Then car retailers and lenders will be able to give you a refinancing quote, based on the settlement fee - the amount needed to pay off the initial finance contract - so you'll be able to see how much lower your monthly payments could be for the same car. 

If you're in the middle of a finance contract and need to refinance or defer your payments, contact your lender to find out your options:

 

Part-exchange your vehicle for a cheaper car

Swapping your current car for a cheaper one can often cut your payments. This requires a settlement fee from your lender, and you'll also need to know how much your car is worth: if possible, compare valuation quotes from car retailers and buying groups.

If your car is worth more than the settlement fee:

You’re in a good position. You'll be able to sell it to a retailer or car buying group, with the agreement of your lender. The proceeds will pay off the finance, leaving a surplus, which can go towards your next car.

You'll be able to cut your monthly payments by choosing a cheaper car on a similar finance agreement.  

It's usually simpler to part-exchange your car with the same retailer that's supplying your next vehicle, but this isn't obligatory and you'll often get better value for money by shopping around.

If your car is worth less than the settlement fee

You’ll have to make up the difference. This can be done with a single payment, but won't always be affordable, as the cost can exceed £1,000 - particularly early in the contract, as cars initially lose value faster than you're paying off the finance.

If your financial situation allows, you could take out negative equity finance. This adds the price of ending your finance agreement to the cost of your next car. You’ll then pay both off in monthly instalments.

In this situation, you may need to choose a car that’s considerably cheaper than your existing one to ensure that you reduce your monthly payments, and avoid your debt spiralling out of control.

 

Sell your car

If you can do without your car, then it’s usually possible to sell it with the permission of your lender. The proceeds are typically paid straight to the lender - as the company owns the car - but you’ll need to top them up if the car sells for less than the settlement fee. You can read more in our guide to selling a PCP car.

 

Voluntary termination

Once you’ve paid off half of the total balance owed (including the large optional final payment in the case of PCP finance), the law allows you to return your car with nothing more to pay. However, you’re also left with nothing.

  • This option is more viable if you have Hire Purchase (HP) or Conditional Sale finance because the deposit and monthly payments cover the full cost of the car. So halfway through the agreement (or earlier if you paid a large initial deposit), you'll have made half of your repayments, opening up the option of returning the vehicle under Voluntary Termination. It's important to understand that you’ll be giving up the right to own the car which would be yours if you continued payments to the end.
  • Personal Contract Purchase (PCP) finance features smaller monthly payments, plus a large optional final payment at the end of the contract that you have to pay to own the car. As a result, it takes many more monthly payments until you've paid off half of the overall debt. You may not reach this point until you're close to the end of the term.
    You can pay the amount needed to reach the halfway point early, but this may not be affordable. Voluntary Termination may also be a poor choice if you're approaching the end of the agreement. At this point, the car may be worth more than the settlement fee required to end the finance early - with the extra value being equity that you can put towards your next car. If this is the case, you could sell or part-exchange the vehicle with the agreement of your lender, with the extra value in the car over the remaining debt being put towards the deposit on your next car, reducing your monthly payments.

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