One of the most misunderstood aspects of car finance is how you can end your agreement early if you need to. Recently we explained the ins and outs of settling a PCP early, and today we will look at a lawful consumer right that is built into every regulated PCP and HP car finance agreement – your voluntary termination (VT) rights.
Voluntary termination is the legal right of a borrower (you) to cancel your finance agreement early and walk away in certain circumstances. Car finance companies don’t like it, and it is usually explained very poorly by dealers. Luckily for you, The Car Expert is here to help!
Many people find that their circumstances change over the course of their car finance agreement: maybe they have lost their job, or their personal circumstances have changed, or other unforeseen factors have made it difficult or even impossible to keep up with their monthly car payments. Depending on the circumstances, many of those people may be eligible for voluntary termination of their agreement.
In this article we will explain what a voluntary termination is, why it exists and how to go about cancelling your agreement by VT. We will also answer a couple of the most common questions about voluntary terminations:
The right to voluntarily terminate your regulated Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement is provided in UK law (Consumer Credit Act 1974, Section 99) and should be included in your contract documentation. It is there to offer protection to consumers who can no longer afford their monthly payments, but equally provides some protection to finance companies to ensure borrowers can’t simply walk away from their obligations at any time.
Whilst the purpose of having a voluntary termination rights clause in a car finance agreement is to protect the consumer, there is also no doubt that some borrowers, and often some dealers, will exploit the clause to allow early cancellation of a PCP or HP if the numbers are favourable.
Although it is a good safety net for consumers, it generally loses the finance company money (as you usually haven’t paid off enough to cover your car’s depreciation, the finance company is taking back a car which is worth less than the outstanding finance amount). Understandably, the finance companies do not like this exploitation one bit, but there is nothing they can do to stop it as termination rights are protected by law.
There is a lot of confusion about voluntary termination, and that suits the finance companies just fine. The reality is that if you do it properly, they can’t stop you and it will not affect your credit score or credit rating (although some finance companies may decline any further finance applications from you).
How voluntary termination works
As long as you repay 50% of the Total Amount Payable (not the total amount borrowed, as you need to include interest and fees), you are entitled to terminate the agreement and return the car to the finance company. As long as there are no “damages if you have failed to take reasonable care of the goods (over and above normal wear and tear)”, you have nothing further to pay.
The total amount payable (which is the total amount borrowed plus interest and fees, and also includes the Guaranteed Minimum Future Value on a PCP) must be clearly shown on any car finance quotation and contract, so you should be able to find it easily enough. You must pay off half of this figure to be able to voluntarily terminate your PCP or HP.
It makes no difference if you bought your car new or used; the law is exactly the same for both.
How do I voluntarily terminate my PCP or HP?
There are a few problems that people run into when trying to exercise their termination rights.
Firstly, the finance companies and car manufacturers hate voluntary termination and would prefer that the clause be removed from the law, so they will not be interested in helping you one little bit. Often, this means they will try and drag the process out as long as possible and try to make you do a lot of running around, since they are still charging you until the termination is exercised.
Luckily, there are some good resources around like this one from LegalBeagles, which contains a template letter to send to your finance company. Be very clear in your language and do not get sidetracked by anything unrelated. You don’t have to sign forms or other documentation; simply send them your letter (e-mail is acceptable but recorded delivery is better) and stick to your guns.
Secondly, the clause is a little vague in that it states that there must not be any “damages if you have failed to take reasonable care of the goods (over and above normal wear and tear)”, but there is no definition of what that means. This gives the finance company an opportunity to try and claw back some money from you by charging you for damage that would not be considered “reasonable care”. They will also often use this clause as an excuse to try and pin you for excess mileage.
Usually this involves threatening letters, large invoices for minor scratches or excess mileage, and various forms and legal jargon to try and scare you into paying up as much as they can get from you. The LegalBeagles link has some excellent advice about ensuring that you document the car’s condition with dated photographs to prove it is in “reasonable” condition when you hand it back. You cannot be billed for excess mileage (which we will cover in more detail on the next page), although you can be sure the finance company will try to charge you for it.
Thirdly, if you have previously defaulted on your loan, they can refuse to allow you to voluntarily terminate the agreement. If you want to terminate your PCP or HP, plan it in advance and keep paying your monthly bills until you are able to exercise your termination rights. The rules are very different if you are terminating the agreement from a position of strength rather than the finance company trying to terminate the agreement and claim costs because you have missed payments. If your financial position is wobbly, then it is better to act decisively and early before your situation collapses and you are no longer able to pay your bills or terminate.
Leases do not have VT rights
There are many types of car finance, and not all of them are equally protected. If you have a lease (such as a contract hire or operating lease), then you are more limited in your options. Getting out of a lease early is normally quite expensive and there is limited support for you to get around it. Leasing is effectively renting the vehicle, with no intention of eventually owning it, so you are not covered by VT rights like you are with a PCP or HP.
Most private borrowers financing their cars from manufacturer finance companies have a PCP or HP, and are therefore covered by voluntary termination rights. Business users are far more likely to take a lease (usually called contract hire). However, a number of finance companies are now starting to promote personal leasing for private individuals, which is partly due to the absence of voluntary termination rights in a lease. Make sure you understand what type of finance agreement you are being offered before you sign on the dotted line.