Car finance: what to do if you can’t afford your vehicle bill - from payment holidays to giving the car back

The cost of living crisis has forced many people to take a hard look at their monthly outgoings, and to save money where they can. But as the financial squeeze of soaring energy, food and fuel bills gets tighter, some are starting to see their financial commitments become unaffordable.

More than two million cars were bought on finance in the 12 months up to February, according to the Finance & Leasing Association, and some of those who used finance to spread the cost of their car may now be worrying about how they will keep up with the necessary repayments if their financial circumstances change.

Finding you can no longer afford your car finance payments is stressful, but the first port of call if you anticipate having problems should always be your finance provider.

Timing is key - act early and talk to your finance provider before you miss a payment. Do not just stop making repayments, as this may adversely impact your credit rating.

Rest assured you won’t be the first person to make that call. Most providers will be used to helping customers overcome an affordability issue and will be keen to work with you to come to an agreement that works for you both.

Your options will vary depending on what type of car finance product you have taken out.

Refinancing your car loan

Refinancing a car loan is typically done by replacing your loan with a new one. You may be able to stretch the new loan over a longer period of time, which can decrease the amount you need to pay each month but may mean you end up paying more overall.

If you are considering finding a new loan, check your agreement terms as some lenders will charge you a termination fee if you pay off your car loan earlier than agreed. Weigh up the prepayment penalty with the potential savings or the lower monthly payments you expect to get from the new loan.

The rate you pay will be dependent on other factors, such as your credit score and recent changes to the Bank of England’s base rate. These could mean that the rates you pay are higher than they were when you first took out your loan - make sure you shop around for quotes to check what rates are available to you.

Car finance payment holidays

Car finance payment holidays were common during the pandemic as an emergency measure to help people struggling during lockdown. However, things have changed since then and not every provider offers them.

First speak to your provider to see what your options are. Remember, even if they do offer you a payment holiday you will still need to resume payments afterwards. If you want to keep the end-date of your agreement the same, your monthly payments will be higher to make up for the missed time.

Alternatively, you may be able to extend your contract by an extra month or two. However, your payments may still increase as the car could lose additional value over the extra time, and you will be expected to cover that loss.

Ending finance or leases early

If you have a Hire Purchase or PCP agreement, there are options available to you that do not involve you paying off the remainder of the agreement. The best thing to do is to contact your finance provider and ask what options may be available to you.

Please note that the options available to you may include handing the car back to the finance provider, early termination charges or making the final balloon payment.  These additional charges coupled together with additional mileage charges, if you have exceeded the agreed mileage cap, may mean you end up paying more than originally agreed.

Coming to an agreement with your finance provider may increase how much interest you end up paying overall, but may make it easier for you to pay back by reducing your monthly payments.

If you are leasing a car, you may be able to hand it back with no penalty in some circumstances depending on what is in your agreement. The AA Smart Lease, for example, comes with a break clause for specific life events such as redundancy, divorce or dissolution of a civil partnership, the loss of a driving licence for medical reasons or the death of a partner.

Selling your car or part-exchanging

If you have bought your car with an unsecured personal loan provided by a finance company, then you own the vehicle outright. This means you can sell the car at any time and can use that money to pay off the remaining debt.

It is also possible to part-exchange a car when you are on a PCP or Hire Purchase deal to get a cheaper vehicle and reduce your payments. You’ll need to get both the settlement figure and the value of your car before working out the difference. However, if you are in negative equity on the loan it can work out to be an expensive swap.

Remember, the best thing to do if you are having trouble making your car finance payments is to contact your finance provider and discuss your options.  It may also be advisable to seek independent financial advice.