If you need a new car while you are in a debt management plan we consider the options available and the effect these will have on your DMP. Having the use of a car is often essential to enable you to get to work or for other family commitments.
However, if you are in a debt management plan (DMP), replacing your old car because it is simply no longer roadworthy is not an easy task. Generally speaking you will not have the funds lying around to simply be able to buy a new car. As such, unless you are lucky enough to have a friend or family member who is able to help you your options will be limited.
One of the affects of a debt management plan is that your credit rating will have become considerably worse. For this reason, it is unlikely that you will simply be able to take a bank loan to buy a new car and the majority of car HP or lease companies will not be able to help you.
One option is to ask a family member who has a better credit rating to take out car finance on your behalf. However if this is not possible, there are still some lenders (called subprime lenders) who will provide finance for a vehicle to people with poor credit ratings. However, you must remember that these lenders will only offer finance at high level of interest.
Revised living expenses budget
Using a subprime lender will mean that your car payments will be higher than normally expected. You therefore need to think carefully about whether these repayments are affordable given that you still need to maintain your debt management plan.
Before agreeing to take up a finance offer, you should first build the new monthly payment into your living expenses budget to see how this will affect your disposable income.
Even if you believe you can afford the new car payments plus make a reasonable payment to your creditors each month, this will generally be lower than your original payments and will have to be agreed with each creditor.
If the reasons for having to take a new car are properly explained to each creditor, the problems should be minimised. However, some or all could start to add interest and charges to your accounts again until the new payment plan settles down.
Taking a payment holiday
An alternative to taking car finance is to temporarily stop paying your debt management plan and save the money to buy a new car outright.
This strategy could work well as long as you can save what you need in a reasonable period of time. You must bear in mind that if you stop making your DMP payments, your creditors will almost certainly start collection activities against you once again and add more interest to your balances.
To minimise this, you should inform all of the creditors about the situation and your need for a new car. If they are aware that unless you have a car, your job could be at risk and therefore any further payments to them reduce or stop all together, there is a chance that they will be more understanding and give you some time.
If you want to take a payment holiday in this way, it is always sensible to continue making token payments to your creditors each month to show your intention to keep paying them.
Consider an alternative solution
One of the possibilities you could consider is moving to a different debt management solution. If after you have taken a payment holiday or a new car finance agreement, your creditors have added interest and your debts have increased, you may feel that a DMP will no longer be able to resolve your debt problem in a sensible period of time.
If you still have sufficient disposable income, you could consider an individual voluntary arrangement (IVA). You are allowed to keep a reasonably priced car in an IVA and your debts will be paid in full after five years.
Alternatively you could consider the option of bankruptcy. This solution can be undertaken even if your disposable income is very low. However it may not be suitable if you are a homeowner with equity in your property and your new car cannot be worth more than £1500.
Continue to use your old car if possible
Because of the difficulties involved with getting a new car while you are in a DMP, you should not consider doing so unless it is absolutely critical. If at all possible, the best solution is to continue using your old car and pay the maximum you can into your DMP. In that way, your debt will be paid off in the quickest time.
However, if you simply cannot avoid having to get a new car then you should consider all of your options carefully and understand how they will affect your DMP and the time it will take you to get out of debt.