One of the most common questions people ask when considering an Individual Voluntary Arrangement (IVA) is how it might affect their chances of buying a home or a car.
Being in an IVA will make it difficult to access almost any form of credit – including car finance – but it’s certainly not impossible and you do have options.
This guide will cover everything you need to know about car finance on an IVA, including what options are available to you and how long you should wait before applying.
How does an IVA work?
An Individual Voluntary Agreement (IVA) is a formal agreement between you and your creditors (the people you owe money to) to repay your unaffordable debt through a series of smaller monthly instalments.
Because an IVA is a legally binding contract, it must be authorised and managed by an Insolvency Practitioner (IP). They will go on to communicate with your creditors on your behalf and distribute your monthly payments among them, ensuring they’re divided evenly.
The first thing your IP is likely to do is to review your income and expenses to determine your level of disposable income. This figure will then be presented to your creditors as the amount you can afford to pay towards your debt each month.
During an IVA, your creditors won’t be able to contact you for payment and all interest and charges on the debt will be frozen. This can allow you to focus on repaying your debt without worrying about legal action or additional fees.
Most IVAs last five years but they can be extended by 12 months if you miss a payment or have a payment break and need more time to pay back the remainder of the money owed.
What is car finance and how does it work?
Put simply, car finance is the catch-all name for a range of options that allow you to borrow money to buy a new or second-hand car and lease it for a set period before buying it outright or handing it back. Depending on your budget and preference, there may be several options available to you.
Most car finance contracts involve you borrowing a sum of money that covers the total cost of the car. This money will then be repaid through a non-refundable deposit (at least 10%) and a series of regular instalments for a set period. The average car finance contract lasts between 36-60 months (three to five years) but can vary depending on the option chosen.
Once you’ve made your final payment, you’ll be given the option to either purchase the car outright, hand it back to the lender, or exchange it for another car. Some car finance options can even be tailored to your individual circumstances.
Because you don’t technically own a car supplied under car finance, there are certain rules you’ll need to stick to during your contract. This usually includes not selling the car, sticking to a pre-determined servicing plan, and not exceeding a set annual mileage amount.
What types of car finance are available?
There are various ways to finance a car with credit. We’ve outlined the three main types of car finance below:
Personal loan
When you get a personal loan, you’ll be given enough money to purchase a car outright before repaying the loan over a set period (up to seven years) at a fixed interest rate.
One of the biggest advantages of a personal loan is that it’s unsecured, meaning the lender can’t take back the car if you stop making payments. However, because this poses more risk to the lender, you’ll likely need a good credit score to convince the lender that you’re a responsible borrower.
This can be a good way to purchase a car that would otherwise be out of your price range.
Hire Purchase
Hire Purchase (HP) is when you pay a small deposit and make monthly payments towards the total cost of a car over the course of one to five years.
Unlike a personal loan – where you buy the car outright at the beginning of the contract – you won’t own the car until you’ve paid the final instalment and the ‘option to purchase’ fee, which is usually around £100.
With Hire Purchase car finance, the loan is secured against the car, meaning the lender could take back the car if you fail to make payments or stick to the contract as agreed. There may also be a penalty for leaving HP car finance early, but this is capped by law.
Personal Contract Purchase
Personal Contract Purchase (PCP) is one of the most popular forms of car finance, but it’s also one of the most complex.
With PCP, you pay a non-refundable deposit towards the car’s full purchase price and borrow the rest. This will then be repaid in monthly instalments, covering interest and depreciation.
Once the repayment term ends (typically after three to five years), you’ll be given the option to buy the car outright, return it to the lender, or trade it for a different make or model.
Personal Contract Hire
Personal Contract Hire (PCH) is essentially a long-term car rental agreement that allows you to lease a car for a set period by making monthly payments towards the total purchase price.
Unlike PCP, you don’t have the option to purchase the car at the end of your contract and must hand it back to the lender after the agreed time.
Most contracts last between two to five years, after which time you’ll be released from any contractual obligations and free to walk away or lease another car if you wish.
Will an IVA affect car finance?
During an IVA, you will need permission from the IP dealing with your case to obtain credit of more than £500 – not doing this is a breach of the terms of your IVA and will likely result in it failing. This means that you’ll definitely need the approval of your IP before securing car finance with an IVA.
Once you’ve informed your IP of your intention to get car finance, they will review your income, expenses, and living costs, and decide whether it’s a reasonable request based on your circumstances.
However, because IVAs require you to pay a significant portion of your disposable income towards settling your debts, you may find that you’re not left with enough money for monthly car finance payments.
IVAs are also a type of insolvency and will be recorded on your credit file for six years and a public database called the Insolvency Register for the duration of your arrangement. This means that, when you apply, lenders will be able to see that you’ve struggled to manage credit in the past and you’ll be limited in the types of car finance that you’re eligible for.
For the types of car finance that require a good credit score, such as a personal loan, you’ll likely find it difficult to get approved if you have a bad credit rating due to an IVA.
What car finance options are available during an IVA?
Getting car finance with an IVA isn’t impossible, but there are some factors you should know about before you make an informed decision. We’ve outlined them below:
Using a bad credit car finance company
Even if you have poor credit, car finance may still be an option for you. There are specialist companies that are happy to offer car finance loans to customers with poor credit scores or histories of struggling to manage debt.
However, it’s important to be cautious when approaching specialist lenders or IVA car finance lenders as borrowing money with a poor credit history likely means you’ll end up paying back more than you originally wanted to borrow in the long run due to higher interest rates.
Car finance vs purchasing a car outright
Before making a decision, it’s vital to weigh up whether you really need car finance or whether another option could be better suited to your circumstances.
For example, if you urgently require a car for work but can’t afford to pay for it outright, car finance is likely to be your best option.
However, if you can manage without a car for the time being, it may be worth waiting until you’ve saved up enough money to purchase it in full.
Using a personal loan to buy a used car
With the value of a new car dropping as soon as it’s driven out of the showroom, you could get more bang for your buck by opting for a used car.
However, car finance companies won’t necessarily have the best value loans – especially for people with an IVA listed on their credit report – and you might have more luck with a credit union.
They are known for helping people who have a poor credit rating and would otherwise struggle to access a loan.
Can I get a car finance agreement after an IVA?
Once your IVA is complete, it will be removed from the Insolvency Register within three months and nobody will know that you struggled with debt or had an IVA in the first place.
However, it will remain on your credit file for a little longer (another 12 months if your IVA lasts the standard five years) and this can make it difficult to get car finance straightaway.
The good news is, as long as you stick to the terms and conditions of your IVA and make payments in full and on time, your credit score should gradually improve and you will find it easier to access credit if you need it.
How long should I wait to access car finance after an IVA?
There is no set time you should wait before applying for car finance after an IVA.
However, even though you no longer need anyone’s permission to apply for car finance after your IVA is complete, it can still be challenging to find a suitable lender willing to lend to you.
Because of this, waiting until you’ve rebuilt your credit score is recommended before applying for car finance. This will allow you to access a better car finance deal with lower monthly payments.
What if I need a new car as soon as possible?
Depending on your job, family, or personal circumstances, waiting for your credit rating to bounce back may not be an option – especially if you’re in desperate need of a car.
Generally, you’re unlikely to get the best car finance deal if you opt for a car before your credit score has recovered. Even if a high-street lender agrees to offer you car finance, you’ll face higher interest rates and stricter terms to counteract the extra risk to the lender.
Just like during an IVA, approaching a variety of lenders can help you get a better idea of the different options available to you. Credit unions may also be a good option if you’re struggling to find lenders to approve your application.
How can I improve my chances of getting car finance with an IVA?
There are several things you can do to improve your chances of getting car finance with an IVA. We’ve listed them below:
Check your credit file for errors
Most people make the mistake of assuming that the information contained on their credit file must be correct and up to date. However, this isn’t always the case and a simple mistake could be dragging your credit score down.
From an old address to a misspelt surname, regularly check your credit file for errors and report them to the relevant credit reference agency as soon as possible.
Register to vote
Registering to vote helps lenders confirm your address and, more importantly, proves that you are who you say you are.
This boosts your credit score and can make it easier to get approved for credit, including car finance. Having your address on your credit file can also save lenders time in trying to find proof of address from other forms of identification.
Stick to the terms of your IVA
Having an IVA will naturally lower your credit score, but it will gradually improve as long as you stick to the terms and conditions of your arrangement.
This includes making payments on time, informing your IP when your circumstances change, and asking permission to borrow more than £500.
Should the impact on my credit put me off getting an IVA?
An IVA can help you deal with your debt in a way that’s much more manageable and affordable for you, so you should try not to be put off by the fact that accessing credit will be more difficult.
Remember, while it might be slightly more challenging to get car finance on an IVA, it’s not impossible and there are several options available to you.
Most – if not all – debt solutions negatively affect your credit score, meaning that, no matter which option you choose, it will get worse before it gets better.
Entering an IVA is the first step to a fresh financial start and will show lenders that you’re committed to putting your problem debt behind you for good. With a little hard work and patience, there’s no reason why you shouldn’t be able to rebuild your finances to their pre-IVA level.