Car Finance can come in many forms, but by far the most common types of finance used are Hire Purchase, Conditional Sale and Personal Contract Purchase (PCP) Agreements.
Another type of finance that is used, but to a lesser extent, is Fixed Sum Loans.
The important thing is these types of finance are not legally the same and the effect they have is different. It is, therefore, important to identify what type of finance agreement you have taken out to finance your car.
Fixed Sum Loans
If you take out a Fixed Sum Loan to buy a car, then you own the car. This may be a loan you took out from your bank or another finance firm but can also mean a loan that a car showroom or garage arranged for you.
The importance of ownership is the car belongs to you and cannot be taken off you without first the Creditor serving on you a Notice of Default, Terminating the Agreement, taking you to Court, obtaining a Decree, serving on you a Charge for Payment and then Attaching the car using a Sheriff Officer.
This means if you cannot repay the debt, you will not necessarily lose the car and you would still have the option of applying for a Time to Pay Direction or Debt Payment Programme under the Debt Arrangement Scheme. These would prevent Sheriff Officers attaching the car.
It’s also worthwhile noting that unlike in the rest of the UK, it is not possible to secure a debt over a car in Scotland, whilst allowing you to have the car; but some lenders, based in England, may suggest they can do this, as it is possible to do it in England. They may, therefore, argue if you don’t pay the loan, they can take the car back. This is not possible in Scotland.
Where you obtain a car using a Fixed Sum Loan, the only procedure that can be used to get the car back by the lender, is the one explained above.
However, a downside of using a Fixed Sum Loan agreement, is the car may be attached and sold by another lender, for non-payment of a debt owed to them, such as Council Tax.
Hire Purchase (HP) and Conditional Sale
These types of finance are different from Fixed Sum Loans. The main difference is that ownership of the Car does not pass until you pay off the sums owed under the agreement, so you only have legal possession of the Car.
An advantage of this is as you do not own the car, no other lender can attach it for a debt owed to them, as you do not own it.
However, a downside of using these types of finance, is if you do not maintain payment to them, the car may be repossessed, although the correct procedures must be used before this can be done.
How does HP and Conditional Sale Work?
Essentially, the way these types of agreements work is you agree to make monthly instalments and at the end you have the option of buying the car, usually by paying an optional lump sum. If you choose not to pay this sum, you can return the car and normally have no further liability. From a legal perspective, they are the same, although they have different names.
In terms of the payments, you agree to pay off the full cost of the finance (which includes the cost of the car and interest charges) over the duration of the Agreement.
The main difference between them, is with a Hire Purchase Agreement you are essentially renting a car but have the option of buying it at the end. With a Conditional Sale Agreement, you are agreeing to buy a car, but ownership does not transfer until you make the final payment.
Personal Contract Purchase Agreements (PCP)
PCP is relatively a new type of agreement that is used to finance the purchase of a car.
Legally, it is the same as a Hire Purchase or Conditional Sale Agreement and is treated the same from the point of view of the Consumer Credit Act 1974.
Also like with Hire Purchase and Conditional Sale Agreements, you don’t own the car until the final payment is made.
Where PCP Agreements differ, however, is you do not agree to pay the full cost of the car off over the lifetime of the agreement, unless you choose to exercise the right to purchase it at the end by making the final optional payment.
What you agree to pay off over the lifetime of the car, is the depreciating value of the car. So, for example, over the lifetime of a 3-year agreement, it may be estimated that a car valued at £20,000 may depreciate by 60% in value. This means you agree to pay off £12,000 in instalments over the three years and then return the car; alternatively, you may take ownership of it by paying the remaining sum (£8,000) as an optional lump sum.
With PCP Agreements there is also a feature called a Minimum Guaranteed Future Value (MFGV). This is normally the remaining 40% (£8,000). This value the Car Finance firm guarantees you the car will be worth at the end of the 3 years, regardless of whether it is or not. This means if it is in reality only worth £6,000 you will not have to pay any more. It also means, however, if the car is worth £10,000, you will have £2,000 that you can use to finance your next car purchase with the car finance firm.
The main differences between PCP Agreement and Hire Purchase and Conditional Sale Agreements, is PCP is significantly less expensive on a month-to-month basis (it may not cost less if you eventually decide to keep the car).
Another feature of Hire Purchase, Conditional Sale and PCP Agreements is you have a right to early terminate all these agreement under section 99 of the Consumer Credit Act 1974. This can be done at any point, providing you have not already gone into default and the firm have not already terminated the agreement.
If you do early terminate the agreement under section 99, then section 100 limits your liability to only half the full amount owed under the agreement, less what you have already paid. It is important to note this is half the full amount owed under the agreement, and not just half the instalments.
Because the way Hire Purchase and Conditional Sale Agreements work, where you pay off the value of the car primarily by making instalments, the point where you have paid half the full amount owing is usually close to halfway through the Agreement.
With PCP Agreements, as you only pay off the depreciating value, and the remaining value is left to the end, the point where you pay off half the full amount owing under the agreement is usually near the end of the agreement.
Voluntary Surrender is different from Early Termination, in that you agree with the Firm that they will take the car and sell it and then offset the sale value from the Credit outstanding.
This can sometimes be better than Early Termination where the car has kept it’s value and what you would owe under Voluntary Surrender would be less than what you would owe under Early Termination.
When you return a car, you must be clear with the Car Finance firm whether you are Early Terminating the agreement or Voluntarily Surrendering the car.
What happens when you don’t Pay?
When you fall into arrears with a car finance agreement, regardless of whether it is a Fixed Sum Loan Agreement, Conditional Sale, PCP or Hire Purchase Agreement, the Lender must serve you a Notice of Arrears once you are two months in arrears. They then must serve a Notice of Default before they can terminate the agreement and demand return of the car.
At this point, you can have the option of applying for a Time Order under the Consumer Credit Act 1974. This can give you more time to repay the debt that is owed (see here to find out more about Time Orders). Where the Agreement is a Fixed Sum Loan, a Debt Payment Programme under the Debt Arrangement Scheme may be a better option than a Time Order, if your lender won’t enter into a voluntary repayment agreement with you.
Where you have not paid one third of the full amount owing under the agreement, when it is a Hire Purchase, Conditional Sale or PCP Agreement, the lender may say they have the right to repossess the car without a court order. However, it is widely believed this is not correct and in Scotland they always need a Court Order. If a Lender argues they can take the car back without a Court Order, unless you agree to allow them to take it back, you should argue they always need a Court Order in Scotland and if they do not obtain one, they may be liable to repay you the full amount you have up to that date repaid under the agreement and you will have no further liability owed under the agreement.
Repossession of a Car
Where you have paid over one third owed under the Agreement, the Consumer Credit Act 1974 is clear, the car cannot be repossessed without a Court Order.
Where a Lender does repossess a car without a Court Order, then under section 91 of the Consumer Credit Act 1974, you can claim back everything you have paid under the Agreement, where it is a Hire Purchase, Conditional Sale or PCP Agreement. You also have no further liability under the Agreement.
Where a lender does take you to Court, you can apply for a Time Order under the Consumer Credit Act 1974. This can allow you to catch up with your payments, whilst allowing you to keep the car and avoid having a Court Order granted against you.
Find out more about Time Orders.