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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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Will a voluntary termination affect my credit rating?

One of the myths about voluntary termination is that it is detrimental to your credit rating or credit score. This is not true. You are simply exercising your legal right to terminate your agreement. Your credit rating will not be affected.

Any termination of a finance agreement will be noted on your credit record and voluntary termination is no different. There are many reasons why a finance agreement may be terminated, so it is not necessarily a problem that your credit record shows the termination – despite what a car dealer or finance company may tell you in order to intimidate you.

For example, sometimes agreements are terminated by the finance company, which happens quite a lot with accommodation deals. If you reject your car under the Consumer Rights Act, the associated finance agreement will be terminated.

Other finance companies will be able to see that the agreement was terminated early, but they won’t necessarily know why. As a result, a voluntary termination should not affect future finance applications with other lenders. It should also have no effect on any other form of credit application such as a mortgage, credit card or personal loan.

However, the finance company (and any associated or sister companies) whose agreement you have just cancelled may well decline any further finance applications. Obviously, their records will contain the details of your voluntary termination, so they are less likely to loan you money for another car. This will very much depend on the circumstances, and there are plenty of people who have terminated their agreement only to start a new contract with the same finance company.

Can I be charged for excess mileage?

Excess mileage is the major point of contention for voluntary termination of PCP agreements. It’s important because a used car’s value is directly linked to its mileage.

Your monthly payments and final balloon (GFV) are determined by the car’s mileage. So a voluntary termination of a PCP on a car with higher-than-expected mileage means the finance company loses even more money.

Excess mileage on a PCP
If your mileage is way over your allowance, the finance company is going to chase you for excess mileage charges. Whether they can enforce that is a different matter.

There’s no provision for excess mileage charges in the law, so in theory, you can’t be charged for exceeding your mileage allowance. However, if you exceed the pro-rata mileage allowance, you can expect the finance company to come after you for an excess mileage penalty.

You do not have to pay this charge, but you will need to be prepared to fight it – potentially for months and against threats of legal action. Despite repeated assertions from the legal community that excess mileage is not enforceable, the finance companies keep trying to charge customers for it.

Their hope is that by bullying you, you will pay up. In plenty of cases, this works. Customers are often terrified when they receive serious-looking letters or threats from legal firms acting on behalf of the finance company, but it’s all a bluff.

One of the ways people exploit the voluntary termination clause is with very high mileage. For example, if you cover 30,000 miles per year, your car will be worth much less after three years than if you only cover 5,000 miles per year. So they sign a PCP agreement for a very low annual mileage (to keep their payments down), then drive much further than the agreed mileage and VT the car with an enormous excess mileage.

Understandably, the finance companies do not like this exploitation of a legal loophole and they do fight it.

If you’ve done 100,000 miles but your car is in good condition, it’s difficult for a finance company to argue that you have not taken “reasonable care” of your car. However, they’ll certainly try and they may well be very aggressive about it.

The finance company is highly unlikely to take you to court over excess mileage on a PCP agreement, regardless of any threats they might make. It’s an empty threat, so be polite but stick to your guns. Again, LegalBeagles is an excellent source of legal advice on this matter.

If you have a regular hire purchase (HP) rather than a personal contract purchase (PCP), you won’t have a mileage allowance anyway, so it won’t be relevant for you.

Are there alternatives to voluntary termination?

Voluntary termination can be useful in specific circumstances, but it won’t always be your best option. If your car is worth more than what you still owe the finance company, you may be able to sell it and use the money to settle your finance. Your finance company may have certain conditions about you selling the car as it technically belongs to them, not you. Speak to them first before proceeding down this path.

If you’d like more information about selling your car for a decent price, check out our commercial partner Motorway.

If you’re in financial difficulties and haven’t reached your 50% termination point, you may be better off talking to the finance company about options for helping through your hardship. They may be open to renegotiating the terms of your agreement by extending the term or waiving some of the interest owed to lower your payments.

Summary

The Car Expert does not condone people trying to take advantage of voluntary termination rights because they can’t be bothered paying what they owe.

You should only ever take out finance you can comfortably repay. If you can’t afford to properly finance a £30K car, then don’t buy a £30K car.

However, if your circumstances change and you’re unable to make your monthly payments, you do have the opportunity to terminate your finance agreement and walk away after paying back half of what you owe.

If everyone starts going down the voluntary termination path, the cost of taking out finance will inevitably start to increase significantly. If the safety net is being regularly abused, the government will quite possibly take away termination rights altogether. So let’s not all abuse it and simply appreciate it as a valuable consumer right. OK?

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
  • Motorly can find you a great car finance deal, even if you have a poor credit rating
  • FairSquare can find and finance either a new or used car, and deliver it to your door

This article was originally published in July 2014, and was most recently updated in April 2021.

Important note for posting comments or questions about this article:
The Car Expert cannot provide legal or financial advice regarding your car finance agreement, or how to proceed when disputing any charges relating to your voluntary termination.

Please read other people’s questions and comments before posting, as they will quite probably apply to your circumstances as well. We will no longer keep answering questions that have already been answered or are explained in the article.

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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.
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