Falling Behind on Car Finance: What to Do and When

Falling behind on car finance rarely happens in one step. There is a sequence: a warning sign, a missed payment, letters from the lender and, in some cases, repossession. Because hire purchase (HP) and personal contract purchase (PCP) agreements are secured on the car, with the lender owning the vehicle until the final payment, the lender’s options are wider than with an ordinary loan. This timeline sets out what happens at each stage, what to do and what to have ready.

Before You Miss a Payment: Contact the Lender Early

The most useful stage is the one before anything goes wrong. If you can see a payment will be difficult, contact the lender as soon as you know, rather than after the payment has failed. Lenders regulated by the Financial Conduct Authority (FCA) must handle arrears in a way that considers forbearance, which means reasonable adjustments, before moving to enforcement.

Have this ready when you call or write:

• your agreement number and details of the car
• a simple budget showing income, essential spending and what you can afford to pay
• the reason your circumstances changed, such as a job loss or illness

Ask for any new arrangement in writing and ask how it will be recorded on your credit file. A written record protects you if the arrangement later shows up differently from what you discussed. It is also worth knowing where this debt sits in your priorities: advisers treat payments for goods bought on hire purchase as priority debts, because the consequence of non-payment is losing the car.

The First Missed Payment: Arrears and Charges

Once a payment is missed, the account is in arrears, which simply means you owe payments that were due and have not been made. Check the contract you signed when buying the car to see what it says about missed payments; that document sets out your legal obligations under the deal.

If you can pay some but not all, pay what you can and explain the shortfall. Keep other payments going if possible. Stopping altogether can harm your credit score and, on a secured agreement, put the car at risk. Keep a note of every call and letter: lenders are expected to keep records of contact about arrears, and your own notes make any later dispute easier to resolve.

Letters and Default Notices: What the Lender Must Send

Expect a letter after the first missed payment. Respond to it, even if you cannot pay yet; silence makes it harder to agree a plan.

If the arrears continue, the lender cannot simply end the agreement and take the car. Agreements made since April 2008 are normally regulated by the Consumer Credit Act 1974, unless they were for business purposes and involved borrowing over £25,000, and FCA conduct rules require forbearance before enforcement. In practice that means the lender is expected to discuss the arrears with you and consider what can be done before it moves towards ending the agreement. Read any letter or notice you receive carefully and check the figures against your own records.

If you believe the lender is handling your case unfairly, complain to it directly and, if you are not satisfied with the response, escalate the complaint to the Financial Ombudsman Service free of charge.

Handy tip

Reply to every letter, even briefly, and keep copies. A paper trail of what you offered and when makes a formal complaint far easier to run if things go wrong later.

Your Options: Catch Up, Restructure or End the Agreement

At this stage there are broadly three routes, each with trade-offs.

Catch up. Paying the arrears restores the agreement to normal, though charges may already have been added. This is the cheapest route if the money is available.

Restructure. Ask what the lender can offer: spreading the arrears across later payments, changing the payment date or temporarily reducing payments. A longer schedule eases immediate pressure, but the trade-off is more interest over the remaining term.

End the agreement. Terminating a hire purchase or conditional sale deal is something you can do at any point by writing to the lender and handing the car back. You must pay all instalments due up to the point you end it. If you have paid less than half the total price of the goods, you may still owe the difference; if you have paid more than half, you usually pay nothing more, though you cannot claim a refund of the excess. Lenders sometimes wrongly insist you must pay the whole amount owed before you can end the agreement; if that happens, take advice. Our guide to ending a PCP or HP deal early explains the mechanics in more detail.

One warning sits alongside these options. While the agreement runs, the car is not yours to sell. Selling or otherwise disposing of it without the lender’s permission is a criminal offence. If you no longer want the car, terminate the agreement properly or get the lender’s written permission to sell.

When Repossession Is Possible and the Protections You Have

The law gives borrowers a specific protection, often called the thirds rule. Once you have paid more than one third of the total amount payable, which includes the deposit, the amount borrowed, the interest and all fees and charges, the car is treated as protected. The lender cannot repossess it without a court order. Your agreement should state what the one third figure is.

If you have paid less than one third, the lender can recover the car without going to court. There is also an exception for protected goods: no court order is needed if you give informed consent, or if the car is being held by someone other than you without your authority.

If a lender takes a protected car without your consent and without a court order, that is a breach of contract. The agreement is terminated, you are released from liability and you can reclaim all the money you paid under it.

If the car is repossessed lawfully, the lender will usually sell it at auction and put the proceeds towards the debt. If the sale does not cover what you owe, the shortfall can remain your responsibility, so take free advice before the car goes.

What Goes on Your Credit File and for How Long

Missed payments, arrangements to pay and any default can be recorded on your credit file and seen by future lenders. An HP or PCP agreement is secured on the car rather than on your home; our guide to secured and unsecured loans explains what each type puts at stake.

Before agreeing to any new arrangement, ask the lender how it will be reported, then check your credit file afterwards. If something appears that does not match what you were told, a written agreement gives you the evidence to dispute the entry. Mistakes can be corrected, but only if you spot them.

Where to Get Free Help With Car Finance Arrears

Free help is available at every stage of this timeline, and earlier is better:

• Citizens Advice can explain your rights under the agreement and help you draft letters.
• National Debtline specialises in this kind of debt and provides sample letters for hire purchase cases.
• MoneyHelper offers free guidance on dealing with creditors.

A debt adviser can also tell you whether a breathing space might apply in your situation. During a breathing space, creditors cannot contact you or try to make you pay, which can buy time to arrange a longer-term plan. An adviser can also help you rank car finance against other debts, since HP and PCP arrears compete for money with rent, council tax and energy bills, some of which carry even sharper consequences.

More on this site

• Missing a Personal Loan Payment: Arrears, Defaults and Your Rights covers the same stages for unsecured borrowing, where the lender cannot take the goods back.
• How Much Does It Cost to Check Your Credit File? explains how to review what arrears and defaults have added to your record.

Your questions

Can the lender repossess my car without a court order?
If you have paid less than one third of the total amount payable, the lender can recover the car without going to court. Above one third the car is protected, so a court order is needed unless you give informed consent or the car is held by someone else without your authority.

Can I sell the car to clear the debt?
Not without permission. Selling a car on hire purchase or conditional sale without the lender’s consent is a criminal offence. If you want out of the deal, terminate the agreement in writing or ask the lender for written permission to sell it.

Will a missed car finance payment affect my credit file?
Missed payments, payment arrangements and defaults can be recorded and seen by future lenders. Ask the lender in writing how any arrangement will be reported, then check your file and dispute entries that do not match what was agreed.

What if I cannot agree anything with the lender?
Complain to the lender first and, if you are not satisfied with the response, escalate the complaint free of charge to the Financial Ombudsman Service. A free debt adviser can also help you put forward an offer the lender is more likely to accept.