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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?

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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.

As we head towards the end of 2022, a new cost-of-living crisis is sweeping the UK (and most of the rest of the world), putting enormous strain on people’s household finances. This will inevitably lead to more people looking for ways to escape from their car finance commitments.

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 it 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.

Incidentally, some of the big motoring websites have basically copied the information in this article for themselves as they’re frankly clueless when it comes to car finance, so you’re in the right place to get the very best information…

Do you need to catch up on the finer details of PCP car finance?

What is voluntary termination?

Voluntary termination is your legal right as a consumer (a private borrower, not a business) to end your finance agreement early and walk away in certain circumstances. Car finance companies don’t like it, plus it’s usually explained poorly by car dealers. The motoring media is not much help, either.

Luckily for you, The Car Expert is here to help.

Voluntary termination allows you to end (terminate) a regulated HP or PCP car finance agreement (Consumer Credit Act 1974, Section 99) at any time. You may have to pay an amount of money to the finance company or you may not, depending on how much you have repaid and the condition of the car. We’ll explain it all below, but your contract documentation will detail your rights.

Why do you need voluntary termination rights?

A car finance agreement will usually run for three or four years, and many people’s circumstances can change over that time. Remember four years ago? Theresa May was the prime minister, no-one had heard of Covid-19, Russia hadn’t caused global chaos by invading Ukraine, Brexit was still a shouting match rather than enshrined in law and Kevin Spacey was still a respected actor. It’s fair to say that a lot can change over the course of your agreement.

But it’s not just national or global issues that impact your situation. You might lose your job, get divorced, have a child, suffer an injury or other medical problem, or one of countless other unforeseen changes to your personal circumstances that can leave you unable to make your monthly car finance payments.

Regardless of what a salesperson may tell you or a car finance company may imply, voluntary termination is your legal right for certain types of finance agreement. However, it doesn’t necessarily mean you can walk away with nothing more to pay.

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 (a very specific and complicated number that we explain further below).

How does voluntary termination work?

You can end your car finance agreement via voluntary termination and return your car to the finance company at any time. However, you have to comply with two key requirements, which means you may still have to pay a lot of money in some circumstances.

  • You must repay – or have already repaid – 50% of the Total Amount Payable (see below)
  • There are no damages if you have failed to take reasonable care of the goods (over and above normal wear and tear)

If you have complied with both of the above, you’ll have nothing further to pay. If not, there will be more to pay to execute a voluntary termination.

What is the Total Amount Payable?

This is a commonly misunderstood term, but it underpins everything about how voluntary termination works. So read this section very carefully.

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.

Contrary to many people’s beliefs, it is not 50% of the contract duration, nor 50% of what you originally borrowed.

If you have a PCP agreement, you usually don’t reach the voluntary termination point until very late in your contract – usually the last few months. 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 roughly 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. So, for example you can VT a 48-month contract after three months, but it will certainly cost you a lot of money to do so.

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 legal 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.

Most finance providers refer to the BVRLA (British Vehicle Rental & Leasing Association) Fair Wear and Tear guidance. However, unless this is stipulated in your contract, it’s not legally enforceable. In any case, there can still be considerable dispute as no guide can cover every situation. Ultimately, it’s all a negotiation.

Can I get a voluntary termination on a used car?

VT is a provision within certain types of car finance agreement, which is not dependent on the type of car. It makes no difference if your car was new or used when you bought it – the law is exactly the same for both.

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’?

However, when you are returning the car (or it is being collected from you), the representative accepting the car will conduct a vehicle inspection to record the car’s mileage and assess its condition. If you are happy with the car condition as detailed on the inspection form, you should sign this form and keep a copy for your records. This will be useful if the finance company subsequently tries to charge you for any damage that was not noted on the form.

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 according to the original contract. 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 in 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.

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.

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


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Stuart Masson
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.