Car finance: Voluntary termination of a PCP or HP

Car finance advice

One of the most misunderstood aspects of car finance is how you can end your agreement early if you need to.  We have previously 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 can change over the course of a car finance agreement:

  • They can lose their jobs
  • Personal circumstances can change
  • Unforeseen factors might 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:

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.
Voluntary termination may be an option to prematurely end your PCP or HP car finance agreement

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 generally 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 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 Future Value (GFV) on a PCP. This means that you usually don’t reach the voluntary termination point until very late in a PCP agreement. For a regular HP agreement, you will usually reach the 50% repayment point about halfway through the agreement.

The Total Amount Payable and termination amount must both be clearly shown on any applicable car finance contract, so you should be able to find it easily enough. You must pay off the termination amount specified 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 generally dislike 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. Do not fill out any “Voluntary Termination packs” they send you, even if they insist that you have to. You don’t – it’s a trap to get you to sign away your legal rights.

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, or what constitutes “normal wear and tear”.

As a result, the finance company can and will 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 charge 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 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. You may have to go down the path of Voluntary Surrender, which is very different to Voluntary Termination and nowhere near as beneficial.

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.

Next page: Will a VT affect my credit rating? Can I be charged for excess mileage?

Stuart Masson
Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

608 Comments

  1. Stuart Masson

    Hi Hannah. You should be able to contact the finance company and increase the mileage allowance (at extra cost, of course) to cover the additional depreciation. Most finance companies will allow this, although some won’t.

  2. I did request this in the beginning but they have advised that they cannot do this. where can I go next?

  3. Stuart Masson

    Well, unless you have any kind of evidence that the salesperson has mis-sold the finance, you’re pretty much stuck with your agreement. The finance company may allow you to make overpayments without additional fees, so you can reduce your debt faster, or you can keep some money aside each month to cover the extra depreciation to pay off at a later date.

    If you’ve only had the car six months, you will currently be in the worst of the negative equity problem as the car has been depreciating faster than you are repaying it. This starts to slow down, and then once the rate of depreciation is less than what you are paying back, you start to reduce that deficit in the later part of the agreement.

  4. I am 2 1/2 years into a 4 year PCP and moving to Canada in a month. I have been told I need to pay £1k to get to 50% mark but can’t afford it, and won’t be able to pay my monthly payments from Canada. When I took out the car they said I can give it back after half the tarn (2 years) but obviously in the contract its the halfway mark. The car is worth no where near my settlement figure. What can I do? Thanks for all your help it’s amazing!

  5. Stuart Masson

    Hi Ellisa. Your finance agreement makes no provision for you wanting to leave the country halfway through your contract. You could try the Brexit argument of “I’m leaving and I’m not going to pay what I owe”, but it’s unlikely to work for you. If you need £1,000 to get to your VT point, then that’s what you’ll need to find.

  6. Hi Stuart,

    I VT’d a BMW in September 2017 only because we were emigrating to Australia, which is where I live now.

    I’ve had a BMW from the same garage for over 8 years and always said we do between 20-25K miles per annum because we car share, only to find out when I VT’d the car that they said I was contracted to 8K per annum, you can imagine my shock! We always traded our car in and got a new one so they probably didn’t care too much until I needed to had the car back, lesson learned never assume they have your best interest at heart.

    Anyway, I’ve just had two invoices sent to me, one for just over £4K for milage and the other for £279 for a couple of scratches.

    All our BMW’s were well taken care of and were serviced at the same garage for 8 years and have the costs and receipts to prove it and believe me it was a costly exercise, but I wanted to ensure we looked after the cars.

    Anyway, when I VT’d the car I stated section 99 of the Consumer Credit Act, which was hghlightd by LegalBeagles here: http://www.legalbeagles.info/forums/showthread.php?77612-How-to-Voluntary-Terminate-a-HP-Agreement-*UPDATED*.

    The letter I got back from BMW requesting £4K for excess mileage stated subsection 2 of the CCA:

    “Termination of an agreement under subsection (1) does not affect any liability under the agreement which has accrued before the termination.”

    Which I also stated to them in my initial email to them. Now to me, the excess mileage was included in the contract that I clearly terminated under the CCA, surely they can’t pick and choose parts of their contract that remains in force or can be charged before I terminated it, which hasn’t happened anyway because I’d needed to have terminated it first for them to arrange collection?

    I now reside in Australia and they are sending letters to my old address, where do I stand and do I really need to pay this excess mileage charge?

    Why is it the case that when you hand the car back to get a new car that they don’t bother to charge you excess mileage, is it because they know they’ll make more than that back from you from the new car?

    Im not asking for legal advice here just your opinion ;-)

    Thanks, I look forward to your reply.

    Derek

  7. Stuart Masson

    Hi Derek. Part-exchanging the car is different to handing the car back to the finance company or VTing it back to the finance company. A BMW dealer is not the same thing as BMW Finance – they are completely separate companies. When you part-exchange a vehicle, the dealer buys the car from you, pays off the finance company and takes care of any repairs before selling it onto the next customer.

    When you return the car to the finance company at the end of a contract or VTing it mid-contract, you are bypassing the dealer and dealing directly with the finance company. The finance company is less interested in your car’s value or saleability and more interested in whether you have discharged your contractual obligations.

    As you are VTing the car, they can’t enforce their excess mileage charges – no matter how much they insist that they can. The bill for damage is entirely negotiable, as the law only states that you are liable for any damage beyond normal wear and tear – but there’s no definition of what constitutes fair wear and tear, so it all comes down to how hard you’re prepared to argue it out with the finance company.

    There is almost certainly a target/reward scheme for their collections people based on how much money they can recoup from you, so they will chase you for as long it takes until you either pay up or they accept that you will never pay up.

  8. Thanks Stuart,

    I realised they were separate companies when trying to VT the car as the garage weren’t interested, which makes complete sense.

    I’ll reply to the invoices via email to BMW and provide a PO Box address since I no longer reside in the UK and I very much doubt they would chase me in Australia, but of course they can try.

    Thanks, I appreciate the effort!

    Derek

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