What happens if I miss a car finance payment?

If your financial situation changes during a car finance agreement, you might find yourself struggling to keep up with payments. You might have lost your job, had other unexpected financial commitments, or just overestimated what you could afford.

If this is your situation, try not to worry. There could be options. This guide covers what happens if you don’t pay your car finance, what steps lenders might take, and what you can do if you’re struggling.

What happens if I can't pay my car finance?

If you miss a car finance payment, the first thing that will happen is your lender might contact you. This is usually a reminder that your payment is overdue, and they may charge you a late payment fee.

If you still don’t pay, things could quickly escalate:

Late fees and penalties

Lenders typically charge a late payment fee if you miss a car finance payment. The exact amount depends on your finance agreement, but if you don’t bring your account up to date, further charges can be added.

Damage to your credit score

If you miss a payment, it may appear on your credit file. This means lenders in the future can see it, and it could make it harder to borrow money down the line. If you miss multiple payments, your credit score could take a serious hit, making it more difficult to get loans, mortgages, or even smaller agreements like phone contracts.

Default notice and account closure

If you continue to miss payments, your lender may issue a ‘default notice.’ This is a formal letter telling you that your finance agreement is at risk of being cancelled.

If you don’t make the overdue payments within the time given (usually 14 days), your account could be defaulted, meaning you owe the full remaining balance. A default will stay on your credit report for six years and could seriously damage your credit score and your future ability to get a loan.

Repossession of the car

Whether you’re in a Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement, the lender owns the car until you’ve made all the payments. If you stop paying, the lender may take steps to recover the car, depending on your agreement and how much you've paid so far.

If you’ve paid less than a third of your total finance amount, they may be able to repossess the car without a court order, depending on the terms of your agreement.

If you’ve already paid more than 50%, you may be able to return the car under ‘voluntary termination’ (more on this below). 

Legal action and debt collection

In extreme cases, if you don’t pay and don’t return the car, your lender could take you to court. This could result in a County Court Judgment (CCJ) against you, which also stays on your file for six years, making it even harder to borrow in the future.

I can't afford my car finance, what are my options?

If you can’t afford your car payment, it’s important to act quickly. Ignoring the problem won’t make it go away, and it could make things worse. Acting now can help you avoid bigger problems down the line.

The first thing you should do is contact your lender. Lenders understand that people go through financial difficulties.

If you tell them what’s happening, they might be able to offer you a temporary payment break (though interest may still be added, increasing the overall cost of the loan). If not, here are some other options you could consider:

Extend the loan term

Some lenders allow you to extend the length of your agreement. For example, if you have two years left on your contract, you might be able to stretch it to three years, lowering your monthly payments. This would mean paying more interest overall, so it’s important to weigh up the costs before making a decision.

Pay off a lump sum

If you can afford it, making a one-off overpayment could reduce your remaining balance and lower your monthly payments. Check with your lender first, as some agreements charge early repayment fees.

Check if you can return the car

If you’ve paid at least 50% of the total finance amount (including interest and fees), you might be able to opt for voluntary termination. This allows you to end your contract early and return the car. However, voluntary termination may come with additional costs, such as wear and tear charges, so check your agreement before proceeding.

If you haven’t paid 50% yet, you may be required to make additional payments to reach this before returning the car.

With PCP, remember that the balloon payment at the end of the contract is included in the total amount, so reaching 50% can take longer.

Consider refinancing

If your current payments are too high, refinancing your car finance might help. This involves taking out a new loan to pay off the existing car finance agreement.

You may be able to find a lower interest rate or reduce your monthly payments, but this will depend on your credit history and lender approval.

Please bear in mind that spreading your outstanding loan over a longer term can reduce the monthly payment but may increase the total amount of interest payable.

Seek financial advice

If you’re in serious financial difficulty, you might benefit from speaking to a debt advice charity like StepChange or Citizens Advice. They can help you explore your options and come up with a plan to manage your debt.

Can I reduce my car finance payments?

Yes, some of these options would help you reduce the payment rather than cancel it altogether.

Some options you have for reducing your car finance payments could be:

• Extending the loan term

• Refinancing

• Paying a lump sum

The right option for you will depend on your circumstances and your agreement. Not all lenders offer the same solutions, so it’s important to speak to them directly to determine the best course of action.

The takeaway

Struggling with car finance payments can be stressful, but you’re not alone, and there are options available.

Whether it’s reducing your monthly payments, refinancing your car, or returning it, taking action early can help you avoid serious financial problems. Don’t ignore the issue; speak to your lender as soon as possible and check your agreement to understand your options.

Disclaimer: This guide is for general information only and should not be considered financial or legal advice. Car finance agreements vary, and the best course of action will depend on your personal circumstances. Always check your agreement and consider seeking independent financial advice from a professional or a debt advice charity like StepChange or Citizens Advice.