Car finance on a debt management plan or after consolidating debt

Two different situations, one question

“Debt plan” gets used for several things, so work out which one you are in.

• A debt management plan or proposal. You have an arrangement with your creditors to pay an agreed amount over time. The Insolvency Service says this works only if all your creditors agree.
• A consolidation loan. You took a new loan to pay out other debts, so you now owe one lender instead of several.
• Working with a financial mentor. You have a free mentor, often through MoneyTalks, who is helping you budget and talk to creditors. You may not have a formal plan at all.

The car question is almost the same in each: can you add a car repayment without breaking what you have already committed to? A lender will ask it in a financial way, and your creditors, if you have a plan, will ask it in a practical way.

Fair Finance is a referral service, not a lender. We cannot promise approval.

Why the plan comes before the application

A debt management plan is built on a budget. Your payment to creditors was set from what is left after your living costs. A car loan is a new cost that did not exist in that budget.

That has three consequences.

1. The plan may not allow new credit. Plan providers and creditors can have conditions. Ask yours before you apply, not after a lender says yes.
2. A missed plan payment can undo the arrangement. Creditors who agreed to a lower payment may go back to their full rights if the plan fails.
3. The car repayment has to come from somewhere real. If it only fits by cutting food or power, it does not fit.

A free financial mentor is the right first call. They can look at the whole picture and, if appropriate, talk to your creditors about whether the plan can include the car costs. MoneyTalks is on 0800 345 123 or text 4029.

What a lender sees

Under the Credit Contracts and Consumer Finance Act (see CCCFA) the lender has to make reasonable enquiries before lending, and it checks that the repayments are affordable. For someone on a plan it looks at:

• Your plan payments as a fixed regular cost, alongside rent and bills.
• How long you have kept to the plan. Twelve steady months says more than two.
• Your credit file. The debts that led to the plan may show as late payments, defaults or both. See car finance with missed payments and car finance with defaults.
• Your income and how steady it is. The same as any application.
• The loan size against the car. A small loan on a cheap car is a smaller risk.

We have not found an official source that sets out exactly how a plan appears on a New Zealand credit file, so ask the plan provider how it will be reported and check your own files with Centrix, Equifax and Experian (formerly illion) before applying.

Consolidation: ask what it really did

Sorted says a consolidation loan is a new loan used to pay out existing debts, ideally at a lower interest rate. Its benefits are a lower rate than credit cards or hire purchase, smaller regular payments and one loan to budget around.

It also lists the risks:

• A longer term can raise the total cost even when each payment is smaller.
• New fees such as establishment or documentation fees, which can run to hundreds of dollars.
• Specialist lenders may charge more interest than a bank.
• It does not fix the cause. If you cannot keep up the new repayments, you are still stuck, and Sorted warns it only helps if you are not running up more debt.

The Insolvency Service adds that you should get a second opinion if you are offered a way to consolidate debt.

For a car lender, the useful question is whether consolidation reduced your monthly commitments. If it did, and you have kept to it for a while, the file tells a better story. If it only moved the debt and added a fee, the lender sees the same load with a longer tail.

A worked example (illustrative only)

These are round, made-up numbers, not a quote.

Say your take-home pay is $1,000 a week. Your plan payment is $200 a week and your living costs are $620, leaving $180. You need a car to get to work.

A $5,000 car with no deposit at an example rate of 24.95% over 36 months comes to about $199 a month, or $46 a week. After fuel, rego, WoF and insurance (say $60 a week), you are at $106, leaving $74. That is thin but possible, and the plan budget is unchanged.

Now the less comfortable version. You take a $9,000 car loan over 60 months to “be done with it”. The weekly payment might look low, but you have turned an agreed plan into a longer commitment with interest, secured against a car that loses value. Always ask for the total cost of credit before signing, and use the repayment calculator.

The better order is: agree the car with your mentor, keep it small, and apply once the numbers hold without touching the plan.

A checklist before you apply

1. Tell your mentor or plan provider you plan to buy a car, and what it will cost.
2. Check whether your plan terms allow new credit.
3. Pull your files from Centrix, Equifax and Experian (formerly illion) and read them.
4. Total the weekly cost of the car: repayment, fuel, rego, insurance, repairs. See what a car really costs to own.
5. Keep the loan as small as you can. A deposit helps.
6. Gather three months of bank statements and proof of your plan payments.
7. Run a PPSR check on any used car.

Red flags

• A “debt solution” company that charges a large upfront fee. Free mentoring exists. Compare it before you pay anyone.
• A lender who does not ask about your plan. They are required to check affordability, so a loan that skips the question is a warning.
• A loan used to clear the plan early with the car as security. If you miss payments, the car can be repossessed.
• Gambling debt. If gambling is part of the picture, the Gambling Helpline is on 0800 654 655.

Cheaper routes to consider first

Work and Income may help with car repairs in some cases. Good Shepherd runs no-interest loans for people who qualify. If you are on a benefit, read our benefit options hub. If your current car can be kept going for another year, that will almost always cost less than a new loan.

A simple 60-day approach

If you are in the middle of a plan and a car is becoming urgent, work in this order.

1. Week 1. Call your mentor or plan provider. Say what the car is for, what you expect it to cost and when you need it. Ask whether the plan allows it and what they would want to see.
2. Weeks 2 to 4. Price the true weekly cost of two or three cheap, reliable cars, including rego, insurance and a repair buffer. Pick the cheapest that does the job.
3. Weeks 4 to 6. Save what you can towards a deposit without missing a plan payment. Missing a plan payment to save for a car is the wrong trade.
4. Weeks 6 to 8. Pull your credit files, gather statements and apply only if the numbers still hold.

If at any point the car repayment only works by squeezing the plan, stop and talk to your mentor again. A late finish to the plan with a working budget beats an early car with a failing one.

Stress-testing the budget before you sign

On a plan, the real test is whether the car payment still works when something goes wrong. Work it out with three months of bank statements, not a guess: take-home pay, minus rent, power, food, transport, insurance, phone, and the plan payment, minus the new car repayment and running costs for fuel, registration, WOF, servicing and tyres. Then see what remains. If a power bill rise, a repair or a few weeks of reduced hours would break it, the loan is too big.

Christians Against Poverty reports that for more than half of the families who come to it for debt help, a car loan is their largest debt, and that car repayments often get paid before essentials like rent. A car loan taken on top of a plan is the pattern to avoid. Talk to your plan provider or free budgeting adviser before applying, since a new loan can change what your creditors agreed to.

How Fair Finance helps

One form, one soft credit check that does not affect your score, and a referral to lenders on our panel. A hard check only comes later, and only if you pick a specific lender. If the right answer is to wait or to speak to your mentor first, we will tell you. Start with the eligibility check or see how it works.

General information only, not financial advice. Check conditions with your plan provider before taking new credit.

Sources

• Insolvency Service: Other ways to manage your debt
• Sorted: Consolidating debt
• MoneyTalks
• Consumer Protection: Payment problems and hardship
• Christians Against Poverty NZ: Vehicle finance