The title of this article is pretty clear. Nevertheless, allow us to repeat the message: Never ever buy a car with outstanding finance! Not even if it’s cheap. Not even if it’s dirt cheap. Just stay away from cars with outstanding finance.
Perhaps you’re now thinking: There is an exception to every rule. So what’s the exception here?
Don’t be fooled: This is the exception to the exception. Buying a car on finance is irresponsible even if you think you know what you are doing. Coming to think of it, it’s wrong even if you know what you are doing.
If you’re still considering it, or if you’re curious about why we’re so passionate about this topic – read on!
What is a car with outstanding finance?
A car with outstanding finance still has debt on it when you buy it. When you become the new owner of the car, you become responsible for this debt.
The possibility of buying a car with outstanding debt has increased over the past two decades. The reasons for this are related to changes on the car finance market.
For one, fewer and fewer cars these days are paid for in cash. Which means that the large majority of vehicle owners in this country has taken up a credit at some point. This alone increases the likelihood of there still being debt on the car.
How likely is this?
It may sound as though buying a car with outstanding finance should be a very rare event.
In fact, it is surprisingly common. According to the industry’s leading car finance check agency, HPI, one in four cars has outstanding finance. Of course, this number is somewhat less meaningful without some information on how much the average debt on these cars is.
You only need to briefly scan the daily news to see several examples of fraud. In a particularly extreme example, a fraudster made £9000 by selling on cars she still had finance on. Eventually the truth did see the light. By then, however, the damage had already been done.
Either way, it does show that the risk of outstanding finance is substantial and serious.
And there’s more.
Personal loans are on the decline – which is bad news for buyers.
If you’re paying for your car by means of a loan from a bank or credit union, you instantly become the owner of the car. These loans are usually referred to as ‘personal’ loans or ‘private’ loans. This means that the person applying for them is personally responsible for them.
Regardless of what happens to the car, you will need to pay off the loan in full. This even applies if the car should break down or get stolen. The loan isn’t secured by the car, although, technically speaking, you can use the car as a security in case you need to default on it.
This is good news for a potential buyer. Should you buy a car from someone who hasn’t as yet paid off his personal loan, you do not run the risk of becoming responsible for it.
Unfortunately for buyers, personal loans are on the decline – or even on their way out. This is because as helpful as they may be if the car is sold on, they have many disadvantages if you need the credit.
Instead, most buyers these days opt for PCPs or HPs.
These finance options are more risky in terms of outstanding finance.
A Hire Purchase is similar to a personal loan. But whereas a personal loan is mostly unsecured, HP is always secured against the car.
On the outside, you’re paying off your car just as you would a bank loan. But if something should go wrong, the finance provider can simply take back the car and auction it off to recoup their losses.
A Personal Contract Plan, on the other hand, is more akin to a leasing. You pay for the depreciation of the car plus interest for a while. After this period has elapsed, you can then either hand the car back or pay the remaining amount in one big lump sum.
Especially with HP, drivers may feel the temptation to sell a car on with outstanding finance. Creditors have a lot to loose here if they need to default on the loan mid-term. They may have sunk thousands into a car they’ll never own. Selling it seems like the only way to minimise their losses.
Is selling a car with outstanding finance legal?
If we’re talking about the majority of car finance contracts in the UK, then no, it isn’t. Let’s be perfectly clear about this. Only in very particular circumstances are you allowed to do this. And even then, there will most likely be provisions.
As Confused explains, you will need to request an early termination of your contract. This doesn’t sound too bad. But it actually is quite problematic.
Lenders are usually loathe to accept an early termination. Especially in HP, their entire calculation is based on you paying the car off. You are legally allowed to return the car only if you’ve paid off less than half the loan sum. But even then, you will need to transfer the remaining instalments until you reach half the car’s value.
With a PCP, the situation is almost identical. So, again, it is not legal for a PCP contractor to sell you a car before they have paid it off in full.
Unfortunately, that won’t stop many from trying.
The good news first …
If you buy a car with outstanding finance, you are entitled to keep it, as WhatCar point out. This is based on the ‘good title’ principle, which states that you bought the car in good faith and without fault of your own.
Maybe this is what you want to do. Maybe you don’t mind paying a little more, because you found the car that’s right for you.
Do bear in mind, however, that this does not absolve you from your new liabilities.
The lender won’t care that you had good title. All they care about is getting their money back. If they can not get it back from the previous owner, they will try to get it back from you.
Of course, you can explain the situation to them and request they drop the loan. This is unlikely to have a positive result.
Whatcar’s conclusion is clear:
“What if I find out the car has outstanding finance before I buy it? Don’t buy the car and walk away. If you know the car has outstanding finance and buy it anyway, you’re just as culpable as the seller and don’t have good title to the car. If the finance company can prove that, it can rightfully recover the vehicle.”
What is the problem with a car with outstanding finance?
At face value, you could simply factor outstanding finance into your calculations. That may be true – if you actually knew it was there! In most cases, however, that won’t be the case.
In fact, outstanding finance is one of the most frequent sources for undetected problems.
As you might have suspected, this is a major issue.
With an HP, PCP and even with regular dealer finance, the finance company owns the vehicle until every single penny is paid off. So if you buy a car with outstanding finance and you can not pay off the debt that’s still on the car, it reverts back to the bank or dealership.
But even if you do have the financial clout to pay off the loan, you now need to pay a lot more than you originally envisioned. Let’s say you bought the car at a decent price. Now, add to that £2-3,000 still owed on the car. Suddenly, the entire picture changes!
Over night, you are saddled with a lot of debt.
In a worse-case scenario, you will not be able to pay back the outstanding debt and the car is sent back to the dealer. You end up with nothing.
Can’t you get your money back?
From all that we’ve said it’s more than clear that outstanding finance is a serious issue. Still, you could argue: “No matter, I’ll just ask for my money back and try to forget any of this happened.”
Unfortunately, that’s not quite as easy as it sounds.
In most cases, people sell cars with outstanding finance because they’re in financial trouble and desperate. It is therefore more than likely that your money wont be there anymore when you demand it back.
And this isn’t even considering the possibility that we’re dealing with criminal activity here. In that case you won’t be able to locate the seller anymore.
But let’s assume, on a positive note, that the seller hasn’t yet spent it. Even in that case, the road to reclaiming your money is long and winding. You will need to hand your case to an attorney, go through the court system and pay for everything in advance. And even if you end up being right, this still won’t guarantee you’ll get your money back.
What if the seller admits to the outstanding finance?
This hardly ever happens, for a very simple reason: Outstanding finance on a car is an obvious red light. It is a clear indication that something isn’t right. It also means you’ll have to deal with a third party and take on the conditions of a contract you never signed off on.
But what if the seller sweetens the deal by significantly reducing the price of the car? Shouldn’t you at least consider the purchase?
The simple reason is that if you do this, you do not have good title. And as a result, the lender can take away the car from you. If push comes to shove, you will have to return the car to the lender and struggle to get your money back from the seller. This is an impossible situation with only one possible outcome: Catastrophe.
But the real question is: Why would you want to you?
The second hand car market in the UK is one of the most dynamic marketplaces in the world. Every day, you can find new offers for great cars at great prices. Dealerships have stepped up their game and now offer excellent finance packages. Already buying on the private market constitutes a risk, but it can be acceptable under certain conditions: if the price is right and you trust the buyer 100%.
Why, with this selection at your disposal, would you risk everything by buying a car with outstanding finance?
As we said in the beginning: Just don’t do it. You really don’t have to.
You can protect yourself against the risk of outstanding finance.
There are two ways of protecting you against the risk of outstanding finance. Which is right for you depends on how and where you intend to buy your car.
If you want to purchase a vehicle from a private seller, you should definitely perform a finance check. We’ve blogged about this before in an in-depth feature on whether or not a free HPI check is possible and recommend you take a look at our findings. In short, some tests are better than others, but in the end, any check which includes outstanding finance is okay.
Your second option is dealer finance.
Right now, if you buy from a dealership in the UK, your chances of buying a car with outstanding finance are as close to zero as they can possibly be. Dealers routinely perform a full check on each car they buy and will refuse to buy any models with outstanding finance. And should they have made a mistake, consumer protection rules will make it easy to return it.
At Concept Car Credit, you can be sure you won’t have to worry about outstanding finance. Quite on the contrary: If you need finance with your car, we are one of the UK’s leading providers of car credit.
Speak to us now for a free first quote. Or visit our digital showroom to take a look at all the incredible cars we have on offer.