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 today we’re looking at a different option for ending your PCP before the end of your contract.
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.
Your legal right
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. 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.
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. It is not simply the halfway point of your agreement, as that is unlikely to be anywhere near the 50% repayment point on a PCP.
For a regular hire purchase (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.
The second point relating to damages is somewhat vague and confusingly written, and we’ll look at how that affects you when your VT your finance agreement below.
How do I start a voluntary termination?
There are a few problems you may run into when trying to exercise your 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.
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 (see below).
Luckily, there are some good resources around like this one from LegalBeagles. It contains a template letter you can send to your finance company.
Voluntary termination, 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, which is a very different thing and something you don’t want to do.
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.
As soon as you formally notify the finance company that you are terminating the agreement, it is considered terminated and there is no need for you to complete any other paperwork.
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.
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.
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.