We quite possibly have difficulties in differentiating between distinct types of consumer debt and banks can be less than useful in explaining these distinctions. One difference which is crucial to be familiar with is whether a particular liability is secured or unsecured. For example take circumstances where you are contemplating buying a car or some other type of motor vehicle. There are a wide variety of ways that you might use to pay for your new or second hand vehicle. If you have the available funds, you may pay wholly in cash. Then again you might purchase your vehicle through trading in your old car and paying the rest in cash.
The other way it can be done is simply by getting an unguaranteed loan from your bank or building society or maybe from a family friend and purchasing the car employing the loan money solely or in some mix with your own cash funds supplemented by the trade-in value of your own previous vehicle. The personal loans acquired in this way are unsecured and the individuals that loaned you the funds have no claim over the goods you acquire with it, in this situation the vehicle. If you acquired the personal loan from a financial institution or building society or another kind of finance company you may well see that this kind of unsecured loan may be detailed in the loan papers as ‘Credit Agreement Regulated by the Consumer Credit Act 1974’ or ‘Fixed Sum (blank) Regulated by the Consumer Credit Act 1974’. Don’t be misled. Neither of these is a Hire Purchase Agreement and if you pay for a vehicle making use of this sort of borrowing in whole or in part, the vehicle is actually your property. The provider of the money has no claim whatsoever over the vehicle and can’t repossess it on ‘security’ grounds.
However, you may find when you go to your vendor to order your car that your supplier recommends that you take out or enter into a Hire Purchase Agreement. You ought to listen diligently to the phrases used by the dealer and read carefully any documents provided. If you acquire a car under a Hire Purchase Agreement, the car is not your property – at least not yet. The text ‘Hire Purchase Agreement’ just signifies that you have entered into an agreement to hire the vehicle with an option to buy it. Hence you don’t have the authority to sell on such a vehicle. Although you may 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 cause you to be the owner of the vehicle.
For that reason, when you go to purchase a car it is very important to distinguish between financing the deal (in whole or in part) with an unsecured loan and financing it (again, in whole or in part) by into a Hire Purchase Agreement – let’s call it simply HP. The first step is to question whoever is funding the deal and to establish if it is a secured or an unsecured loan you are being offered. If you are being offered HP, you’ll have an opportunity to check out the contract documents. Be sure that the papers are titled ‘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’. They are both suitable titles for HP.
If you wish to be doubly sure, check the wording of the HP agreement. The words of the agreement ought to include a part called TERMINATION: YOUR RIGHTS’. This part confirms that you have a right to finish 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 correct HP Agreement should also include a section titled ‘REPOSSESSION: YOUR RIGHTS’. This section explains your legal rights in the event that the HP company plans to repossess the vehicle. There are other standardized sections in a valid HP Agreement and if the agreement before you ticks all the boxes above, then it is highly likely that that is what it is. You won’t become the proprietor of a vehicle purchased under a Hire Purchase Agreement until you’ve settled all the finance payments due in 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 lenders, you’ll have to carry on and pay the full amount of the monthly HP payment. As a collateralized obligation, the HP agreement is comparable to a mortgage in that respect. The HP loan cannot be entered into the IVA unless you go into default on your HP payments. If you do go delinquent on your HP payments, the HP provider can, and probably will, repossess the vehicle (according you your due rights within the contract). Any deficiency that comes up 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 other unsecured debts.