One of the questions we are often asked is from people who have encountered unexpected medical issues and want to offload their car, either because they’re not able to drive or they need to save some money.
It’s usually quite a stressful situation and, understandably, people get frustrated if they are not getting clear answers from their car finance company or other sources. Then, of course, there are privacy issues that prevent family members or loved ones gaining information about a car finance account on your behalf if you’re not able to sort it out yourself.
But what are your rights and what can you realistically expect? There’s a lot of misunderstanding about this, and a myth still exists that claiming ‘medical grounds’ allows you to simply give back your car and walk away from your contract. This is simply not true, as I’ll explain below.
If your financial difficulties are related to Covid-19, then there are specific guidelines for car finance companies to follow. However, this is not limited to coronavirus-related medical grounds. It covers anyone whose financial position has been affected by society being completely upended over the last year.
The short answer
In very nearly every case, there will be nothing in your car finance agreement that allows you to cancel your contract on medical grounds, regardless of how serious the situation is. Even in the event of your death, the finance company still expects to get its money back from your estate.
There are also no real provisions in law that you can fall back on to avoid your debt obligations.
Usually, protecting your financial situation against medical problems is something covered by either loan protection insurance (LPI) or payment protection insurance (PPI). After the PPI scandals from early in the last decade, it’s now a far less popular product than it used to be, although it was never particularly popular with car finance agreements anyway.
So, on the surface of it, the answer is no, you can’t cancel your car finance agreement on medical grounds. You still owe the finance company money and they still expect you to pay it back.
The longer answer
Unfortunately, the answer here is still no. But there are steps you can take that may reduce your costs or at least make them manageable, which may be enough to help you get through a difficult financial period.
Although the finance or leasing company has the law on its side with regard to your contract, it still has an obligation to help a customer in difficulty. Financial difficulties arising from medical grounds certainly fall under this obligation, although the finance company’s definition of ‘help’ is probably quite different from yours.
Car finance and car leasing are regulated in the UK by the Financial Conduct Authority (FCA), a government-appointed body whose job it is to ensure that financial matters are being conducted fairly and responsibly.
As well as being regulated by the FCA, all of the major companies in the UK selling car finance or managing vehicle leases are members of the Finance and Leasing Association (FLA) and/or the British Vehicle Rental & Leasing Association (BVRLA). These organisations both have codes of conduct that relate to how their members should treat customers in times of hardship. For example, here is the FLA’s lending code.
In summary, your debt is unlikely to simply go away but the finance company is obliged to offer you some solutions to help reduce your burden. You are also able to propose solutions to the lender.
The type of assistance that the finance or leasing company is likely to offer or accept may include:
- a payment holiday to temporarily pause your loan, usually for a period of three months
- reducing or waiving interest and fees on the loan to reduce your monthly payments
- restructuring the loan to help reduce payments (usually by extending the loan period by several months)
- accepting a reduced settlement figure to repay the loan early
- allowing you to sell the car to pay off your loan (if the car’s value is likely to cover the debt)
As you can see, none of the above suggestions allow you to simply exit the contract and walk away with nothing more to pay.
Relief now may cost you later
It’s important to note that although some of the above offers may sound helpful, they may also be adding cost to your loan in the longer term.
For example, if you take a three-month payment holiday on your finance agreement, you will accrue interest on those three months where you’re not making any repayments. This can add hundreds of pounds to your overall debt by the end of your agreement. Similarly, if your finance company offers to reduce your monthly payments but extend your term length, chances are you will be paying more interest overall.
One more important point is that accepting any changes to your loan may be noted on your credit record, which may affect your ability to borrow money in the future. The fact that the help was requested on medical grounds won’t protect you from that, although your credit record won’t show the reason for the contract alteration.
If you’re in financial hardship and unable to meet your payments, getting your finances under control now is probably a far more pressing concern. But it’s still something you should be aware of if you think that it’s only likely to be a temporary problem.
What about voluntary termination or voluntary surrender?
These two things sound very similar but are actually very different. They also only apply to secured car finance agreements, like a PCP or hire purchase. They do not apply to leasing (contract hire) or unsecured loans like a personal loan from your bank. Again, ‘medical grounds’ won’t change your rights when it comes to minimising your financial obligations.
We have a comprehensive guide to voluntary termination here at The Car Expert (it’s been our most popular article for the last seven years!), so I won’t repeat it here in detail. Its benefit to you will depend on the sort of car finance agreement you have. If you have a PCP, you can usually only hand your car back with nothing further to pay in the last few months of your contract. If you’re close to your VT point, it may still be a fairly low-cost way of settling your finance agreement.
If you have a hire purchase (no balloon payment at the end), your voluntary termination ‘walk away’ point will be somewhere closer to halfway through your contract, depending on how much deposit you put in at the start and whether you had a part-exchange.
If you are calling your finance company to being the voluntary termination process, make sure you are very clear that you want to execute a voluntary termination as set out in your contract and the Consumer Credit Act 1974 (Section 99). That way they can’t ‘accidentally’ misinterpret you and assume you meant voluntary surrender, which you definitely don’t want…
Voluntary surrender may sound quite similar to voluntary termination but it’s a very different thing. It’s really a last resort option if you have absolutely no other way of managing your way through your difficulties.
Basically, you surrender the car to the finance company and default on your agreement. They will collect the car and sell it at a trade auction. The sale price of the vehicle will clear a chunk of your outstanding debt but it almost certainly won’t cover all of it, so the finance company will come after you for whatever is still owing. Plus they will add on admin fees, the cost of collecting the car, any damage beyond normal wear and tear, auction costs and anything else they can think of.
The net result of all this is that you may still owe thousands of pounds to the finance company and your debt may not have reduced by very much at all. Plus you’ll have a big black mark on your credit record for defaulting on the loan. In addition, by the time most customers get to the point of voluntary surrendering their cars, they’ve already missed some payments and are having to face collection agents as well as negotiating with the finance company.
It’s all deeply unpleasant in every way so, as I said, it’s definitely a last resort option and claiming medical grounds won’t help you. Really, the only scenario that’s worse is doing absolutely nothing and waiting for the finance company to send in collection agents to repossess the car and bully you for money you don’t have.
Act early to minimise the pain
As upsetting as it may be to try and choose the least worst option for sorting out your car finance when you’re already dealing with medical issues, one of the most important things you can do is act early – preferably before you start missing payments and your account falls into bad standing.
The finance company is far more likely to be responsive to the medical problems causing you if your account is still paid up to date with no missed payments. They’re obliged to present options for settling your debt or managing your payments, but if you’ve already defaulted and it’s been handed over to a collections agency to recover the money then sorting it all out will be much harder.
Falling behind on your payments may also affect your ability to voluntarily terminate the agreement, so you may be cutting off another potential solution to your problem.
Finally, given that we’re talking about this in the first place because significant medical issues have affected your household finances, reaching a solution early will help to keep your stress levels under control and prevent further damage to your health. Having certainty, even if it’s not the solution you want, can also help your family manage whatever’s to come rather than waiting until debt collectors are banging on your door to confront it.