Will a voluntary termination of my PCP or HP affect my credit rating?
One of the myths about voluntary termination is that it is detrimental to your credit rating or credit score. This is not true. You are simply exercising your legal right to terminate your agreement. Your credit rating will not be affected.
Any termination of a finance agreement will be noted on your credit record, but no details of why it was terminated will be displayed. This is not uncommon, despite what a car dealer or finance company may tell you in order to intimidate you.
Sometimes agreements are terminated by the finance company, which happens quite a lot with accommodation deals. If you reject your car under the Consumer Rights Act, the associated finance agreement will be terminated. There are many reasons why a finance agreement may be terminated, so it is not necessarily a problem that your credit record shows the termination.
Other finance companies will be able to see that the agreement was terminated early, but they won’t know why. As a result, a voluntary termination should not affect future finance applications with other lenders. It should also have no effect any other form of credit application such as a mortgage, credit card or personal loan.
The finance company whose agreement you have just cancelled, however, may well decline any further finance applications. Obviously, their records will contain the details of your voluntary termination, so they are less likely to loan you money for another car.
Can I be charged for excess mileage?
Excess mileage is the major point of contention for voluntary termination of PCP agreements (see our comments section below). It’s important because a used car’s value is directly linked to its mileage.
Your monthly payments and final balloon (GFV) are determined by the car’s mileage. So a voluntary termination of a PCP on a car with higher-than-expected mileage means the finance company loses even more money.
There’s no provision for excess mileage charges in the law, so in theory, you can’t be charged for exceeding your mileage allowance. However, if you exceed the pro-rata mileage allowance, you can expect the finance company to come after you for an excess mileage penalty.
You do not have to pay this charge, but you will need to be prepared to fight it – potentially for months and against threats of legal action. Despite repeated assertions from the legal community that excess mileage is not enforceable, the finance companies keep trying to charge customers for it. Their hope is that by bullying you, you will pay up. In plenty of cases, this works. Customers are often terrified to receive serious-looking letters or threats from legal firms acting on behalf of the finance company, but it’s all a bluff.
To be very clear, the finance company cannot charge you for excess mileage, only any costs if “the debtor has contravened an obligation to take reasonable care of the goods”.
One of the ways people exploit the voluntary termination clause is with very high mileage. For example, if you cover 30,000 miles per year, your car will be worth much less after three years than if you only cover 5,000 miles per year. So they sign a PCP agreement for a very low annual mileage (to keep their payments down), then drive much further than the agreed mileage and VT the car with an enormous excess mileage.
Understandably, the finance companies do not like this exploitation of a legal loophole.
If you’ve done 100,000 miles but your car is in good condition, it’s difficult for a finance company to argue that you have not taken “reasonable care” of your car. However, they’ll certainly try and they may well be very aggressive about it.
The finance company will not take you to court over excess mileage on a PCP agreement, regardless of any threats they might make. It’s an empty threat, so be polite but stick to your guns. Again, LegalBeagles is an excellent source of legal advice on this matter.
The Car Expert does not condone people trying to take advantage of voluntary termination rights because they can’t be bothered paying what they owe.
You should only ever take out finance you can comfortably repay. If you can’t afford to properly finance a £30K car, then don’t buy a £30K car.
However, if your circumstances change and you’re unable to make your monthly payments, you do have the opportunity to terminate your finance agreement and walk away after paying back half of what you owe.
If everyone starts going down the voluntary termination path, the cost of taking out finance will inevitably start to increase significantly. If the safety net is being regularly abused, the government will quite possibly take away termination rights altogether. So let’s not all abuse it and simply appreciate it as a valuable consumer right. OK?
This article was originally published in July 2014, and substantially updated in October 2017.
Important note for posting comments or questions about this article:
The Car Expert cannot provide legal or financial advice regarding your car finance agreement, or how to proceed when disputing any charges relating to your voluntary termination.
Please read other people’s questions and comments before posting, as they will quite probably apply to your circumstances as well.
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