Most people buy their car – whether new or used – on a finance deal that breaks the cost down into a series of monthly payments. While you’re making those payments, the balance due is known as outstanding finance and it becomes particularly relevant if you need to switch to a different car.
You see, it’s against the law in the UK to sell a car that has outstanding finance against it. The balance must be cleared in full before the car changes hands. Unfortunately, some people don’t do that, leaving the car’s unwitting new owner liable for the outstanding finance.
But there are ways of dealing with the situation if you need to sell a car that has outstanding finance, or find you’ve bought one with it. Here, we’re going to explain everything you need to know about outstanding finance, how it affects you and how to deal with it.
What to do if your car has outstanding finance
When you pay monthly for a car, you don’t actually own it. You’re its registered keeper, as detailed on the V5C registration document, and have free use of it, but it technically belongs to the finance company that funded the purchase. It’s illegal to sell something that doesn’t belong to you without the owner’s knowledge, so the outstanding finance must be paid off in full if you need to switch cars before the end of the contract.
First thing to do is contact the finance company and find what the remaining balance is – that’s the combined total of all the monthly payments left. You can then compare that number against an online car valuation to find out if you’re in profit or negative equity.
Paying off the balance makes you the car’s legal owner and you’re free to sell it on. If you can afford to pay it off yourself, do so. If not, you still have options.
Most reputable car dealers and buying services will pay off outstanding finance for you out of the amount they offer for the car. Whatever’s left is given to you directly, or it can be put towards the cost of your next car in place of a part-exchange.
Here’s an example of what we mean:
There’s £12,500 of outstanding finance on your car and a car buying service offers you £15,000 for it. The service pays off the finance and deposits £2,500 in your bank account.
If a dealer made the same offer, you could take the money or put it towards the cost of another car that’s in stock, either as a cash payment or as a deposit on a new finance deal.
Be wary of negative equity if going down this route. If there’s £12,500 of outstanding finance but the car is only worth £10,000, you’ll still have to find £2,500 to pay off the balance.
Top tip: if a buying service or dealer pays off the balance for you, ring the finance company a day or two later to make sure the payment went through.
How can I protect myself against outstanding finance?
The finance used to buy a car is tied to its registration number and the registered keeper is liable for making the payments. If the payments suddenly stop, the finance company will endeavour to make contact with the person who signed the contract to secure the remaining balance.
If they can’t be found, however, the finance company will track down the car’s next registered keeper. It doesn’t matter if that person didn’t sign the finance contract, they’re in possession of a car that legally belongs to the company and it’ll seek to recover the remaining balance or repossess the car.
Unfortunately, this situation occurs all too often, leaving innocent parties many thousands of pounds out of pocket. But there are ways you can protect yourself.
The easiest thing to do is carry out a Parkers HPI car history check on any used car you’re interested in. HPI stands for hire purchase investigation and the organisation holds records of car finance agreements. A HPI check reveals if there’s any outstanding finance on car and if its been written off.
Most car dealers carry out an HPI check on their stock as a matter of course, so ask to see a printout of the report for any car you’re interested in. Check out more Parkers used car buying advice.
FAQS
Is it OK to buy a car with outstanding finance?
No. A car bought on finance legally belongs to the company that funded the purchase until all payments have been made in full. It’s illegal to sell something that doesn’t belong to you and the buyer is on very shaky legal ground.
If you’re interested in a car and discover it has outstanding finance, the sensible thing to do is walk away. If you unwittingly buy a car with outstanding finance, you’ll probably only find out when the finance company comes looking for its money.
At that point, you can file a claim under Section 27 of the Hire Purchase Act 1964. You have to prove that you bought the car in good faith without knowledge of the outstanding finance and therefore hold good title to it. However, if you didn’t carry out an HPI check before the transaction, you may compromise your position because you didn’t conduct due diligence.
Can a dealer sell a car with outstanding finance?
No. It’s illegal to sell a car with outstanding finance because it legally belongs to the finance company that funded its purchase. Any dealer selling a car with outstanding finance will also be committing a number of other crimes related to the sale of goods.
Some dealers buy cars with outstanding finance from the person who signed the contract, but the remaining balance will be paid off out of the sum the dealer pays for the car. The dealer’s then free and clear to sell it.
If you subsequently find out you’ve unknowingly bought a car with outstanding finance from a dealer, you should file a claim under Section 27 of the Hire Purchase Act 1964 with the finance company and report the dealer to the authorities. There are plenty of other used car buying scams to watch out for, as well.
I’ve bought a car with outstanding finance, what can I do?
If this happens, you’ll probably only find out when the finance company contacts you looking to get its money. At that point, you have several options. You can clear the outstanding finance or let the company repossess the car, but both leave you thousands of pounds out of pocket. You could then pursue a claim against the seller, but that’ll cost yet more money and an awful lot of time, and may not even be successful.
Your main legal recourse is to file a claim under Section 27 of the Hire Purchase Act 1964. This gives you the chance to prove that you bought the car in good faith and didn’t know about the outstanding finance, therefore you have legal grounds to assume ownership of it. This can be tricky to do, especially if you didn’t carry out due diligence before purchase, such as a HPI check.
Looking for more jargon-busting motoring meanings? Head over to our Parkers Car Glossary page and take a look at our other definitions.
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