People sometimes have difficulty in distinguishing between different types of personal debt and lenders can sometimes be less than helpful in explaining these differences. One distinction which is important to understand is whether a personal debt is secured or unsecured. Take for example a situation where you are considering buying a car or some other type of motor vehicle.
There are a wide variety of ways that you can pay for your new or second hand vehicle. If you have the funds available, you can pay wholly in cash. Alternatively you may purchase your vehicle by trading in your old vehicle and paying the balance in cash.
Another way you can do it is by obtaining an unsecured loan from your bank or building society or even from a family friend and purchasing the vehicle using the loan funds only or in some combination with your own cash funds supplemented by the trade-in value of your own old vehicle. The loans obtained in this way are unsecured and the people who loaned you the money have no claim over the goods you bought with it, in this case the vehicle. If you obtained the loan from a bank or building society or another type of finance company you are likely to find that such an unsecured loan may be described in the loan documents as ‘Credit Agreement Regulated by the Consumer Credit Act 1974’ or ‘Fixed Sum Loan Regulated by the Consumer Credit Act 1974’. Do not be fooled. Neither of these is a HP Agreement and if you purchase a vehicle using such a loan in whole or in part, the vehicle is now your property. The lender of the funds has no claim whatsoever over the vehicle and cannot repossess it on ‘security’ grounds.
However, you may find when you go to your dealer to purchase your vehicle that your dealer suggests that you take out or enter into a Hire Purchase Agreement. You need to listen carefully to the words used by the dealer and read carefully any documents provided. If you acquire a vehicle under a Hire Purchase Agreement, the vehicle is not your property – at least not yet. The words ‘Hire Purchase Agreement’ simply mean that you have entered into an agreement to hire the vehicle with an option to purchase. Accordingly you do not have the right to sell on such a vehicle. Even if you have paid a deposit in cash or otherwise or traded in your own vehicle as part satisfaction of the Hire Purchase Agreement, that does not make you the owner of the vehicle.
For that reason, when you go to buy a vehicle it is important to distinguish between financing the deal (in whole or in part) using an unsecured loan and financing it (again, in whole or in part) by entering into a Hire Purchase Agreement – let’s call it simply HP. The first step is to ask whoever is financing the deal which it is. If you are being offered HP, you will have an opportunity to examine the contract documents. Make sure that the documents are entitled ‘HIRE PURCHASE AGREEMENT REGULATED BY THE CONSUMER CREDIT ACT 1974’. An alternative title used in HP documents is ‘CONDITIONAL SALE AGREEMENT REGULATED BY THE CONSUMER CREDIT ACT 1974’. These are both acceptable titles for HP.
If you want to be doubly sure, check the text of the HP agreement. The text of the agreement should include a section entitled TERMINATION: YOUR RIGHTS’. This section confirms that you have a right to end the agreement and explains how you can and should go about doing so, if that is what you want to do. Furthermore, the text of a valid HP Agreement should also include a section entitled ‘REPOSSESSION: YOUR RIGHTS’. This section explains your rights in the event that the HP provider wishes to repossess the vehicle. There are other standard sections in a valid HP Agreement and if the agreement in front of you ticks all the boxes above, then it is highly likely that that is what it is. You will not become the owner of a vehicle acquired under a Hire Purchase Agreement until you have paid all the installments due under the agreement and exercised your ‘option to purchase’ right at the end of the term of the agreement.
In the event that you enter into an Individual Voluntary Arrangement with your creditors, you will have to continue to pay the full amount of the monthly HP premium. As a secured liability, the HP agreement is similar to a mortgage in that respect. The HP debt cannot be entered into the IVA unless you default on your HP payments. If you do default on your HP payments, the HP provider can, and probably will, repossess the vehicle (according you your due rights under the agreement). Any shortfall that arises would attain ‘unsecured’ status and be entered into your IVA as an unsecured debt. At that point it would rank for dividend equally with all your other unsecured liabilities.