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. Today we will look at a consumer right that is built into every regulated personal contract purchase (PCP) and hire purchase (HP) car finance agreement – your right to voluntary termination (VT).
Voluntary termination of a PCP or HP 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, plus it is usually explained poorly (or not at all) by dealers. Luckily for you, The Car Expert is here to help!
Often people’s circumstances change over the course of a car finance agreement:
- They can lose their jobs
- Personal circumstances can change
- Unforeseen factors can make it difficult to keep up with their monthly car payments
Depending on the circumstances, you may be eligible for voluntary termination of your car finance agreement.
In this article, we will explain what a voluntary termination is, why it exists and how to go about cancelling your agreement by voluntary termination. We’ll also answer a couple of the most common questions about voluntary terminations:
- Will a voluntary termination of a PCP or HP affect your credit rating?
- Can you be charged for excess mileage?
UK law provides you with the right to voluntarily terminate a regulated HP or PCP agreement (Consumer Credit Act 1974, Section 99). Your contract documentation will detail your rights.
The law is there to protect consumers who can no longer afford their monthly payments. Equally, it provides protection to finance companies to ensure borrowers can’t simply walk away from their obligations at any time.
Voluntary termination clauses in car finance agreements are there to protect consumers. But there’s no doubt that some borrowers will exploit the clause to allow early cancellation of a PCP or HP if the numbers are favourable.
Although voluntary termination provides a safety net for consumers, it loses the finance company money. Usually, you haven’t paid off enough to cover your car’s depreciation, so the finance company is taking back a car which is worth less than the outstanding finance amount.
Understandably, finance companies do not like this exploitation one bit. But there is nothing they can do to stop it as the law protects termination rights.
There is a lot of confusion about voluntary termination, and that suits the finance companies just fine.
The reality is if you do voluntary termination properly, they can’t stop you. What’s more, voluntary termination will not affect your credit score or credit rating. However, some finance companies may decline any further finance applications from you.
How voluntary termination works
You can end your agreement and return your car to the finance company as long as:
- You repay 50% of the Total Amount Payable (not the total amount borrowed, as you need to include interest and fees)
- There are no damages if you have failed to take reasonable care of the goods (over and above normal wear and tear)
Assuming you have complied with both of the above, you’ll have nothing further to pay.
The Total Amount Payable is the total amount borrowed plus interest and fees. It also includes the Guaranteed Minimum Future Value (GMFV) on a PCP. This means that you usually don’t reach the voluntary termination point until very late in a PCP agreement. For an HP agreement, you will usually reach the 50% repayment point about halfway through the agreement.
The Total Amount Payable must be clearly shown on any car finance contract, so you should be able to find it easily enough. You must pay off half of this figure to enact a voluntary termination of a PCP or HP.
It makes no difference if you bought your car new or used; the law is exactly the same for both.
Voluntary termination of a PCP or HP: Where do I start?
There are a few problems people run into when trying to exercise termination rights.
Firstly, finance companies and car manufacturers hate voluntary termination and would prefer the clause be removed from the law. You can expect them to show little interest in helping you.
Often, this means they’ll try to drag the process out as long as possible. Also, they may try to make you do a lot of running around. This is because, until you terminate the agreement, they can keep charging you.
Luckily, there are some good resources around like this one from LegalBeagles. It contains a template letter you can send to your finance company.
Be 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 (email is acceptable, but recorded delivery is better) and stick to your guns.
Secondly, the damage clause is a little vague. 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.
As a result, the finance company can try to claw back money from you. They will charge you for damage that would not be considered “reasonable care”, and will often use this clause as an excuse to try to pin you for excess mileage.
Usually, this involves threatening letters and large invoices for minor scratches or excess mileage. There will often be various forms and legal jargon to try and scare you into paying up.
LegalBeagles has some excellent advice about documenting your car’s condition with dated photographs to prove it is in “reasonable” condition when you hand it back.
Finance companies cannot bill you for excess mileage (which we will cover in more detail on the next page), although you can be sure they will try.
Thirdly, if you have defaulted on your loan at any point prior to your attempt to terminate the agreement (ie – missed payments), they can potentially refuse to allow it.
If you want to terminate your PCP or HP, plan it in advance. Keep paying your monthly bills until you can 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 cancelling the contract and claiming costs because you have missed payments.
If your financial position is looking wobbly, it is better to be decisive and act early. If your situation collapses and you are no longer able to pay your bills, you may well end up unable to terminate your car finance agreement either.
Leases do not have voluntary termination 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.
It’s expensive getting out of a lease early, and there is limited support available to help you. You are simply renting the vehicle, with no intention of eventually owning it. As a result, you are not covered by VT rights like you are with a PCP or HP.
If you are a private borrower financing your car from a manufacturer finance company, you’ll generally have a PCP or HP. Therefore you should have voluntary termination rights to end your agreement.
Lease agreements (usually a form of contract hire) are usually preferred by business users. However, a number of finance companies are now promoting personal leasing for private individuals. This 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.