Novation

Definition

Novation is when a new contract is substituted in place of an existing one. In finance terms, this would be the exchange of one agreement for another.

When would I need to use a novation?

The most common occurrence of novation is if you decided to refinance the car or outstanding balance during the initial contract period. This may be because you are struggling to make the payments and have come to an agreement with the finance provider of a way to manage the outstanding debt. Or your financial circumstances may have changed and you might want to increase your monthly payments or pay off the car early.

There may also be circumstances when your finance provider is changed from one company to another. The contract would be switched between providers, so a new contract would need to be put in place. You may have decided to refinance your car through another provider, or you may have had to take up a specialist lender to help you meet the monthly repayments.

The agreement may not always need to be substituted for a new one. It depends on the arrangement you make with the finance provider. But make sure you have everything sent to you in writing, so that you have some record of any changes being made. Just to give yourself that extra bit of protection

Novation is a legal term, and details of the circumstances of when the agreement may be substituted for another during the term of the contract.

Will the finance company offer me a novation?

It is unlikely the finance company would offer a novation or to change your finance agreement unless you approach them first. If the company is regulated by the Financial Conduct Authority (FCA), they are obligated to try and help the customer if they experience any financial difficulties and are struggling to pay off the outstanding balance of the contract.

The finance provider will discuss with you all sorts of options should you let them know about any potential difficulties with making repayments, so it’s a good idea to get in touch as soon as you are aware of any such issues. The earlier you do it, the better you will be able to control the situation.

If, as part of the situation, you are offered a substitute contract (a novation), then you will be able to cement that new agreement.

Will a novation affect my credit rating?

A novation by itself will not affect your credit rating. In fact, if you have taken steps to help yourself out of a difficult financial situation by approaching the finance provider and finding a way to prevent a default or missed payment, then you are likely to help preserve your credit rating.

But, if the finance provider has had to put in place a new contract after you have missed payments, or you have been forced to refinance with a different provider because of your circumstances, then this is likely to affect your credit rating. While this should prevent you from entering into a default and having the product you’ve financed repossessed, that missed payment will be recorded on your credit file and affect your credit score.