Outstanding finance is one of the biggest risks in today’s car buying marketplace. We cover what it is, the problems it causes and explain what protection the law offers to consumers who buy a vehicle subject to outstanding finance.
What is outstanding finance?
Over 90% of new vehicle and 50% of used vehicle sales are financed these days. You sign the finance agreement and the finance provider pays the retailer for the vehicle. You drive the vehicle away and – like with any loan – you pay the finance company back in monthly instalments plus interest over a period of time (term).
Secured outstanding finance makes all the difference
The vast majority of motor lending is what is known as ‘secured finance’. Essentially this means that the finance company owns the vehicle while you are paying off the loan. This provides ‘security’ to the finance company because it gives them legal rights to take the vehicle away in the event of non-payment.
What types of finance agreement are secured?
Hire Purchase, Conditional Sale and Personal Contract Purchase are some of the most common forms of motor finance agreement and are all types of secured finance products. Buying a vehicle using one of these products means won’t own the vehicle until you have paid all necessary payments and fees to the finance provider. What you are required to pay has to be set out in the finance agreement you sign.
How does secured finance work in practice?
Most motor finance is arranged by a credit broker. Typically this is either dealership staff or a specialist motor finance broker. You find your perfect vehicle and the credit broker arranges the finance based on your circumstances and preferences. The right type of finance product depends on a number of factors. These include how many miles you are looking to travel in the vehicle annually, if you want to own it or not at the end of the agreement and how much you can afford to repay on a monthly basis.
You cannot usually obtain secured finance to buy a vehicle privately e.g. from another consumer who is selling their vehicle. Secured finance tends to only be provided by finance companies through dealerships and motor finance brokers.
How does unsecured finance differ?
The most common forms of unsecured finance include personal loans and credit card spending. When you buy products this way you instantly own those items legally. The funding can be used to buy any product and is not linked to one item such as a motor vehicle. The finance provider has pretty much no power to take items you buy away from you.
Therefore unsecured finance would not be considered as ‘outstanding finance’ where vehicles are concerned. Someone that pays for a vehicle using a personal loan can sell it, although they would also have to make sure they settle the loan.
Why is it a problem if I buy a used vehicle that has outstanding finance?
Lets explain this using a hypothetical, but realistic scenario:
You see a nice shiny BMW on Facebook Marketplace and arrange a viewing with the private seller. You pay the seller and drive it away.
A month later a letter appears through your door from a repossession agent acting on behalf of a finance provider. It says that it has evidence to suggest you are in possession of it’s client’s vehicle and they are taking steps to repossess it from you.
You contact the person that sold the car to you and they ignore you. The lender provides legal evidence that they are rightful owners. A month later a repossession agent arrives at your door. You have no choice but to hand them the keys. You’ve lost the car and the money you paid.
This outcome is very common if you buy a used vehicle subject to outstanding finance. See our 5 must follow rules when buying a car.
If the seller still owes money to a finance provider are they committing fraud by selling the vehicle?
Yes they are. All secured motor finance agreements have terms that stipulate that the vehicle cannot be sold during the term of the agreement while there remains outstanding finance. Selling a vehicle you do not own is known as conversion fraud.
Importance of buying a comprehensive vehicle check before you buy
The above scenario demonstrates the importance of checking a vehicle first before you buy it. Total Car Check’s Gold Check includes an outstanding finance check which provides a finance guarantee up to the value of £30,000 to give you peace of mind.
My vehicle check report says the vehicle I am looking to buy has outstanding finance, what should I do next?
Do not go through with the purchase.
If you haven’t found an alternative and remain keen on buying the vehicle contact both the seller and finance provider. There can be a number of legitimate reasons that lead to the delay of the finance clearance process. Just because there is outstanding finance it doesn’t mean the seller is always acting fraudulently.
But don’t buy until you have received a full provenance report that confirms the vehicle has passed all important checks. This must show no outstanding finance. The report should also come with a finance data guarantee otherwise if the data is wrong you won’t be protected.
What is wholesale or unit stocking finance and should I buy a vehicle if this is showing on my vehicle check report?
If you are buying the vehicle from a retailer then it is quite common for this to show on a report.
Wholesale or unit stocking finance is funding provided to dealers to help them purchase stock for their forecourts. The retailer will typically use your funds to clear the unit stocking finance it owes. But if you are buying on finance then the unit stocking details will be replaced by the finance agreement you enter into on a report.
Make sure however that before you purchase the vehicle the dealership provides you with confirmation that the wholesale finance has been cleared.
If you are considering buying the vehicle from a private seller then any outstanding finance showing against a vehicle is a cause for concern.
I’ve bought a vehicle with outstanding finance, does this automatically mean I lose it?
Not necessarily. Back in the early 1960’s this very issue was considered and law makers at the time provided some protection to vehicle buyers. The law is the Hire Purchase Act 1964 and the protection is known as ‘Innocent Private Purchaser’. In the 1960s a vehicle check was something that not many people undertook (although it was available). It was therefore felt that consumers should be afforded some protection if they purchased a vehicle that was subject to a finance agreement. This protection still exists in law today, which covers all nations of the UK.
Would I be classed as an Innocent Private Purchaser (IPP)?
If you’ve bought a vehicle with outstanding finance then you would need to answer yes to all six questions below to be deemed an IPP. Many motor finance providers would run through an IPP questionnaire with you in order to establish if they are dealing with an innocent purchaser. They will also look to question their customer, the person who sold the vehicle to you.
1. Have you bought a motor vehicle?
The law requires that you have bought a ‘mechanically propelled vehicle intended or adapted for use on roads to which the public has access‘. This includes a car, motorbike, van or lorry but not a caravan or trailer.
2. Is the outstanding finance agreement a Hire Purchase or Conditional Sale agreement?
This includes a Personal Contract Purchase agreement, but not a Personal Contract Hire or other form of lease agreement. You can find out more about the different types of finance agreement on the Financing Your Car website.
3. Has a sale of the vehicle been made to you?
You would need to be able to prove that payment was made for the vehicle. The law does not protect purchasers if the vehicle is gifted or exchanged for another vehicle.
4. Are you a private purchaser?
You must be a consumer. The legislation does not offer protection to trade buyers such as motor dealers or finance companies.
5. Did you buy the vehicle in good faith?
This depends on the circumstances of the purchase. But essentially it aims to understand if you bought the vehicle innocently. Factors that determine ‘good faith’ include:
- Price – was the amount you paid reasonable and in line with the market average? If you paid way below market value then this does not demonstrate good faith.
- Vehicle check – did you run an outstanding finance check first with Total Car Check or another provider?
- Family linkages – is there any relation between you and the seller, or is the seller a friend of the family? This is sometimes not helpful as it can lead to an accusation of you being implicit in the act of defrauding the lender.
- Proof of payment – are you able to prove what you paid and show that the sale was legitimate?
- Physical checks – did you conduct physical checks of the vehicle prior to purchase and obtain and check the V5C against the vehicle and the vehicle’s Vehicle Identification Number (VIN)?
- Tax and insurance – did you arrange for the vehicle to be taxed and insured prior to or on the date of sale? This helps show you intended to purchase in good faith.
- Type of payment – did you use cash to pay for the vehicle? If so was there a reason you didn’t use other forms of more secure payment?
6. Were you unaware of the existence of a finance agreement against the vehicle?
If for example the seller told you that your payment would allow them to settle the outstanding finance, prior to purchase, then you would not be deemed to be acting in good faith.
Should I contact the finance provider or repossession agent if I get a letter from them?
Yes you should. This is the only way you can start to demonstrate that you are an IPP and purchased the vehicle in good faith. The sooner you contact them the better.
Will I get to keep the vehicle?
Most of the time finance providers will seek to repossess the vehicle initially. You would need to prove in court that you acted in good faith in order to receive the vehicle back.
But there are exceptions whereby you would automatically be deemed the legal owner of the vehicle.
- The person that sold the vehicle to you was not the finance provider’s customer – this could happen where the finance provider’s customer had sold to another person who then sold it to you. In this instance you are protected and own the vehicle.
- You have purchased the vehicle from a dealer or another trader – this could happen if the lender’s customer had sold the vehicle to a dealer and then they sold it to you.
If you have evidence to show you are an IPP then you can make a formal complaint in writing to the finance company. If they do not respond to your satisfaction within 8 weeks then you can escalate the case to the Financial Ombudsman Service. Beyond this you would need to take legal action.
What about the Total Car Check finance guarantee, how does that work?
If you undertook a Total Car Check Gold check prior to buying the vehicle and the report incorrectly showed that the vehicle was clear of finance, then you may be able to claim up to £30,000 against the outstanding finance check guarantee we provide. See the terms and conditions on our website.