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Car finance: Voluntary termination of a PCP or HP

A guide to voluntary termination of your car finance agreement. What legal rights do you have?

Voluntary termination is one of the most misunderstood aspects of PCP car finance, so we’ve put together this comprehensive guide to explain your right to end your agreement early if you need to.

We have previously explained the ins and outs of settling a PCP early, but here we’re looking at a different option for ending your PCP before the end of your contract.

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).

This guide will explain what a voluntary termination is, why it exists and how to go about cancelling your agreement by VT. We’ll also answer a couple of the most common questions about voluntary termination.

What is voluntary termination?

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, that leave you unable to make your monthly finance payments. You might lose your job, your personal circumstances can change in different ways, or other unforeseen factors might make it difficult to keep up with your monthly car payments.

Depending on the circumstances, you may be eligible for voluntary termination of your car finance agreement with nothing more to pay and no penalties.

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.

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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. It does this by setting the minimum repayment amount at 50% of the total amount payable (which we’ll explain shortly).

Exploiting the safety net

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 that 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 your 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 does voluntary termination work?

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, and not half of your scheduled monthly payments)
  • 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.

What is the Total Amount Payable?

This is a commonly misunderstood term, but it underpins everything about how voluntary termination works.

The Total Amount Payable is the overall cost of the vehicle, plus interest and fees on what you’ve borrowed. It also takes into account any deposit or part-exchange that you put in at the start of the agreement.

On a PCP, this includes the balloon payment, which is a large lump sum that you have borrowed but do not repay until the very end of the agreement (it’s also called the guaranteed future value, or GFV, which is technically a different thing but it doesn’t matter here).

To be able to voluntarily terminate your agreement, you have to repay (or have already repaid) 50% of the Total Amount Payable. It is not 50% of the contract duration, or 50% of what you borrowed.

If you have a PCP agreement, you usually don’t reach the voluntary termination point until very late in your contract. Because of the large balloon amount, you have borrowed much more money than you are repaying with your regular monthly payments.

For a regular hire purchase (HP) agreement, you will usually reach the 50% repayment point about halfway through the agreement because your monthly payments cover the entire borrowing with no balloon payment at the end.

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 can still enact a voluntary termination of a PCP or HP if you haven’t reached this point, but the finance company will invoice you for whatever is still owed to get to the 50% point, which could be thousands of pounds.

It makes no difference if you bought your car new or used; the law is exactly the same for both.

What sort of damages are covered and not covered?

The point relating to damages is somewhat vague and confusingly written.

The law 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)”. However, there is no definition of what that all means, or what constitutes “normal wear and tear”.

This means that there is considerable opportunity for the finance company to try and charge you for damages, while there is also no legal guidance as to how much the finance company can charge you for damages. It’s ultimately all a negotiation.

How do I start a voluntary termination?

Theoretically, enacting a voluntary termination is as simple as writing to the finance company. In reality, it usually gets more complicated. There are a few problems you may run into, so it’s important to make sure that you have everything sorted out first.

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.

Voluntary termination may be your legal right but finance companies and car manufacturers generally dislike it, and would prefer the clause be removed from the law. They’re not exactly going to go out of their way to help you.

The finance company will quite probably lose money when you VT your finance agreement, so they 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.

Consumer legal advice forum 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. LegalBeagles also has a template letter you can send to your finance company to start your voluntary termination.

It’s also important to know that if you have defaulted on your loan (ie – missed payments), the finance company can potentially refuse to allow you to voluntarily terminate your agreement.

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 (see below).

Do I need to fill in a ‘Voluntary Termination pack’?

Voluntary termination is not voluntary surrender

There is a big difference between voluntary termination and voluntary surrender. If you don’t communicate your intentions to the finance company very clearly, it could cost you thousands.

Under a voluntary surrender, you give back the car but still owe whatever is left to pay. The finance company will sell the car at auction (adding on extra costs for collecting and disposing of the vehicle) and then come after you for whatever you still owe.

This is pretty much a worst-case scenario, as the finance company will still be chasing you for money even though you’ve already given back the car.

Be clear in your language and do not get sidetracked by anything unrelated. Specifically, point out that you are exercising your legal right to voluntarily terminate your car finance agreement as set out in your contract and the Consumer Credit Act 1974.

This is important so that the finance company can’t accidentally or deliberately misconstrue your termination for voluntary surrender.

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.

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.

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.

If your agreement has voluntary termination rights, they will be clearly spelled out in your contract. 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?

Here at The Car Expert, we are building commercial partnerships with companies who can offer you competitive PCP deals on either a new or used car (as well as other types of finance if you prefer). Check these out before signing any finance agreement with a car dealer:

  • We Finance Any Car can arrange PCP or HP finance at competitive rates
  • FairSquare can find and finance either a new or used car, and deliver it to your door

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Looking for an alternative to dealer finance? Our commercial partners can offer you a great deal.

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Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive 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.
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