Car finance after a debt repayment order

If you have been through a debt repayment order, or you are partway through one, you probably need a car and want to know when you can get finance for it. The honest answer has two parts: what the rules say, and what a lender will decide. The rules are clear. The lender’s decision is not something anyone can predict or promise.

What a debt repayment order is

According to the Insolvency Service, a DRO gives you extra time to repay unsecured debts. The main points:

• You can only get one if you owe less than $50,000 in unsecured debt.
• You must be unable to pay your debts now but able to make some repayments over time.
• It usually lasts three years, though it can be shorter or longer.
• Your payments go to a Supervisor, who passes them to your creditors.
• While it is in force, creditors cannot keep chasing the debts included in it or add interest and penalties to them.

A DRO is not bankruptcy. It does, however, sit on a public register while it runs, and the Insolvency Service says that insolvency options, including a DRO, affect your credit rating for five years or more.

Your current car loan during a DRO

Car finance is usually a secured debt, because the car is the lender’s security. The Insolvency Service says secured debts are generally not included in a DRO while the secured item stays with you. You need to talk to the lender and either:

• keep paying the loan, or
• let the car be repossessed.

If the car is repossessed or sold and money is still owing, that remaining balance becomes unsecured and is then included in the order. If you are finding the car payments hard, see what to do when you can’t afford car repayments, and talk to your Supervisor before you act.

New borrowing during a DRO

This is the part that matters most if you want another car. The rule on the Insolvency Service page is that you must not take on any new debt over $1,000 without making the new creditor aware that you are in a DRO. It advises telling the creditor in writing. Debt you take on after applying is not part of the order, so you must pay it separately.

Two practical things follow.

• Disclose, in writing. A car loan is far above $1,000, so the lender has to know. Hiding it would break the rule and could put the order at risk.
• Expect the lender to decide for itself. The rule says you must tell them. It does not say they must lend, or that they will not. Each lender sets its own policy and decides case by case. We cannot say how any particular lender treats an order in force.

For this reason, this site’s check is for people whose DRO has finished. If you are still in one, speak to your Supervisor or the Insolvency Service before you apply for credit of any kind.

What changes when the DRO ends

Once the order is completed you no longer have to pay the outstanding amount owed to the creditors in the DRO. Your name is removed from the public DRO Register. Creditors that were not included can still pursue you, which is why a DRO application should list all unsecured debts.

What does not change overnight is your credit history. The Insolvency Service points out that an insolvency option affects your rating for five years or more. We have not been able to confirm the exact length of time each credit bureau shows a DRO, so we have left it out. The best step is to ask each bureau for your own credit report and read what it shows. Centrix, Equifax and illion are the main ones in NZ.

What a lender will look at afterwards

A lender looks at the whole picture, not only the order. Typically that includes:

• Your income and how steady it is
• Your living costs and other debts
• Your credit file, including how you have repaid since
• The deposit you can put in
• The car, its age and value, and the amount you want to borrow

By law a lender must check that a loan is suitable and affordable for you before it lends. Time since the order ended, steady work and a record of paying everything on time all help show that a loan is affordable. None of that is a promise. Lenders decide case by case.

Planning a car loan you can really afford

After a DRO, the main risk is taking on a repayment that is tight. The order exists because debt got on top of you, so a conservative plan matters more than a flashy car. Here are example repayments for smaller loans at an example rate of 14.95%, paid weekly. The rate is an illustration only, not an offer.

The interest on $8,000 is $1,938.96 over three years and $3,370.06 over five years. The shorter term is dearer each week but costs about $1,431 less in total.

Add the other costs the car brings. Insurance, registration, warrant of fitness, fuel and servicing all come from the same income. Work out the total weekly cost and compare it with what you have left after rent or mortgage, food, power and your other commitments. Leave a buffer.

A deposit helps in two ways, since it reduces the amount borrowed and so the repayment and the interest. Use the weekly calculator or the home page calculator to test amounts, and see car finance with low repayments for the trade-offs of longer terms.

Steps to take

1. Confirm your order has ended. Keep your completion paperwork.
2. Check your credit file with the bureaus and fix any errors.
3. Set a weekly budget for the whole cost of the car, not just the loan.
4. Save what deposit you can.
5. Compare offers. Our check is a referral service, not a lender or a dealer. It sends one application and one soft credit check to a panel of NZ lenders. Nobody can promise approval. See the disclosure page for how it works.

If money is tight along the way, free help with budgeting is available from MoneyTalks on 0800 345 123.

Sources

• Insolvency Service: debt repayment orders for eligibility, secured debts, borrowing rules and the DRO Register
• Consumer Protection NZ: loan for your car for what lenders must check and provide
• MoneyTalks for free budgeting help