Lots of used cars are sold with money still owed on them. Here's how car finance works, what the law says if you buy one by mistake, and how to protect yourself.
Most new cars in the UK are bought on finance, so plenty of used cars come up for sale with money still owed. Buying one by mistake can be stressful and expensive. Here's what you need to know.
Who owns a car on finance?
With hire purchase (HP) and most personal contract purchase (PCP) agreements, the finance company owns the car until the last payment is made. The driver is the registered keeper, so their name is on the logbook (V5C), but they don't own it. The logbook isn't proof of ownership, which is why a seller with the logbook can still be selling a car that isn't theirs to sell.
A personal loan is different. The borrower owns the car outright and the loan isn't tied to it, so it doesn't affect a buyer. Leased cars (personal contract hire) are never owned by the driver and shouldn't be sold at all.
What happens if you buy one
If you buy a car privately that's still under an HP or conditional sale agreement, the law gives you some protection. Under the Hire Purchase Act 1964, a private buyer who buys in good faith, without knowing about the finance, can become the owner of the car. The lender's claim is then against the seller, not you.
But that protection has limits:
- You may have to prove you didn't know about the finance. If a check was available and the signs were there, that can be harder.
- It doesn't protect motor traders, so a dealer who buys the car from you later may be affected.
- It doesn't cover logbook loans (bills of sale), where the car is security for a loan. In that case the lender can take the car back, even from you.
- Even when you're protected, sorting it out can take time, letters and calls with the finance company.
This is general information, not legal advice. If you've already bought a car with outstanding finance, contact the finance company and get advice, for example from Citizens Advice.
How to protect yourself
- Run a history check before you pay. A full check shows finance agreements registered against the car, with the finance company and the agreement dates. Check a car.
- Ask the seller directly whether there's any finance on the car, and get the answer in writing.
- If there is finance, don't pay the seller and hope they settle it. Ask for a settlement letter from the finance company, and either pay the lender directly or wait until the seller shows written confirmation that it's been paid off.
- Pay by bank transfer so there's a record of who you paid.
The finance might be for a different car
Finance records are linked to the registration. If a private plate has moved between cars, an agreement can sometimes show against the wrong vehicle. A good report shows the make and model on the agreement, so you can see whether it matches the car you're looking at. If it doesn't, contact the finance company to confirm before you buy.
Buying from a dealer
A reputable dealer should check for finance before selling a car and settle it as part of the sale. You also have stronger rights when you buy from a dealer. See buying from a dealer or privately.