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Car finance advice

Coronavirus: Can I cancel my car finance?

Lost your job or find yourself furloughed and need to urgently save money? Here’s a guide to whether you can do anything about your car finance.

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For the many who’ve found themselves with a reduced income because of the coronavirus lockdown, cutting costs is becoming a vital move.

Car finance payments can represent a large chunk of your monthly outgoings. For most people, it’s the second-largest monthly cost after the mortgage or rent payment, so it’s a huge concern for millions of car owners with hefty car finance debts right now.

With the government restricting movement for potentially months to come, it might seem like a pointless extravagance to be paying so much for a car you can’t use. But should your car finance payments be cut? Here are answers to some of the questions you might have…

I can’t afford my car finance payments at the moment. What can I do?

The first and most important thing to do is speak to your lender as soon as you feel that you may have difficulties making your monthly payments. Although there are no general provisions in place to help car owners with their finance payments (unlike the mortgage or rental payments on your house), being upfront and honest with the provider will let them help you.

If you try to grin and bear it and start missing payments, things can escalate quickly and you will probably be in a much worse situation very quickly.

In the event your lender is not sympathetic to the situation, The Motor Ombudsman says to contact them and they can put you in touch with people who can help.

Will it make a difference depending on the type of finance I have?

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Yes, it will. But unfortunately, the most popular types of car finance are also the most problematic when it comes to resolving financial troubles.

A hire purchase (HP) or personal loan will give you the best chance of being able to sell the car and pay off your finance debt, because your monthly payments have been reducing the debt by a reasonable chunk each month.

However, a personal contract purchase (PCP) – by far the most popular type of car finance agreement in the UK – is likely to be more difficult, especially if you are still early on in your agreement, as you are borrowing a lot of money but making much lower monthly repayments, meaning you have much more debt at every stage of the agreement.

We’ve looked at the most popular ways of funding a car here, along with a breakdown of the key elements of each:

Personal loan

With a personal loan, the finance is not secured against the car so you can sell it to a dealer or to a private buyer and use the money to pay off the loan or to make your payments for the next few months.

You don’t have the right to hand the car back (voluntary termination), but on the other hand, the lender can’t repossess it if you fail to make your monthly payments.

Can I sell my car? Yes
Will that cover my debt? Your chances are better than with other types of finance
Can I get a payment holiday? Speak to your bank or finance company, but your chances are reasonable if you have a good credit record
Am I eligible for voluntary termination? No, because the loan is not secured against the car

Hire purchase

A hire purchase is a form of secured finance, meaning that the car essentially remains the property of the lender until the last penny of your loan has been repaid.

That means you don’t have the legal right to sell the car, although in practice your lender will normally allow you to sell the car to a recognised car dealership or a car buying service (like We Buy Any Car or similar). Instead of paying you for the car, the dealer will pay the finance company whatever is owed. If there is still a shortfall, you have to pay for it.

You may want to consider voluntary termination if you have already repaid 50% of your Total Amount Payable (as set out in your contract), or if you are reasonably close to reaching the 50% mark and are able to pay the difference. For more information about voluntary termination, we have a comprehensive guide here.

Since the finance is secured against the car, the finance company can repossess the car (with or without a court order, depending on how much you have repaid) if you fall behind in your monthly payments.

Can I sell my car? No, unless your finance company agrees to allow it
Will that cover my debt? Your chances are better than with other types of finance
Can I get a payment holiday? Speak to your finance company, but it is not favourable for them so they may not agree
Am I eligible for voluntary termination? Yes, and there’s a good chance that it won’t cost you any money to do so

Personal Contract Purchase

The personal contract purchase is, by a long way, the most popular form of consumer car finance in the UK. A PCP is a form of hire purchase, so most of the same rules and regulations apply. You need to get the finance company’s permission to sell the car and the car can be be repossessed if you fall behind in your payments. However, the nature of how a PCP works makes it harder for you to be able to resolve any financial difficulties.

The main difference between a PCP and an HP in this situation is that your settlement figure (the amount you owe the finance company) is likely to be much higher, and usually much more than the car is worth. This means that even if you can sell the car, if won’t be nearly enough to cover what you owe. This is the inevitable result of a PCP having much lower monthly payments than an HP – you’re simply not clearing as much of your debt each month.

Can I sell my car? No, unless your finance company agrees to allow it
Will that cover my debt? Almost certainly not, which means you will have to cover any shortfall
Can I get a payment holiday? Speak to your finance company, but it is not favourable for them so they may not agree
Am I eligible for voluntary termination? Yes, although it may cost you a lot of money to reach the required 50% point

What about PCH customers?

PCH (personal contract hire), or leasing, works differently to the types of finance listed above. That’s because it’s basically a long-term rental, where you pay £X per month to drive the car for a few years. You’re not borrowing any money like you are with a loan. There are no refund rights or voluntary termination rights because you’re not buying the car, simply renting it.

Contract hire has become increasing popular in recent years because the monthly payments are usually the lowest of any type of finance for a given car. The sting in the tail is that it’s also usually the most expensive type of finance to try and get out of in hard times.

Your contract with the lender is unlikely to contain any provisions to reduce or delay your repayments due to lost income. If you try to cancel the agreement, you will be liable for any fees set out in the contract, which could easily run into many thousands of pounds.

However, from a practical point of view, the leasing companies don’t want all their customers to start cancelling their agreements. Even allowing for the expensive penalty fees, it would be very costly for the lenders, so there’s a fair chance you will be able to come to some arrangement. Get on the phone and speak to your leasing company, because they might have a plan for coronavirus-affected customers.

Can I sell my car? No, not under any circumstances
Can I cancel my lease? Yes, but there are eye-watering penalty fees. However, the leasing company may be prepared to negotiate these under the circumstances
Can I get a payment holiday? Speak to your leasing company, but it is not favourable for them so they may not agree
Am I eligible for voluntary termination? No

What is voluntary termination and does it apply here?

Voluntary termination, which is part of the 1974 Consumer Credit Act, allows you to return the car without charge if you’ve paid off half of what you owe (the Total Amount Payable) in a regulated car finance agreement. That covers PCP and HP car finance, but not a personal loan or a PCH agreement.

Voluntary termination can be a useful option if you’re in a desperate situation and need to cut costs, but it causes considerable confusion, particularly for PCP customers. In a PCP, the Total Amount Payable includes the final balloon payment, so you may not reach your 50% repayment mark until right near the end of your three- or four-year finance agreement.

We have a comprehensive guide to voluntary termination here at The Car Expert, which is by far the most popular article on our entire site. Have a good read to decide whether it’s something that may work for you.

Also, be clear with the lender that you want voluntary termination, because if they start going down the route of ‘voluntary surrender’ you could end up paying a lot more.

Speak to your finance company

The most important thing is to take early action and get in touch with your finance company. Don’t bother calling the dealership where you bought the car – there’s probably no-one there to pick up the phone anyway, and all they will do is refer you to the finance company. The only thing the dealership can do is offer to buy your car and settle your finance, which may be an option but you’ll still need to speak to your finance company first to understand how much you owe.

Speaking to the lender is important if you are in financial difficulties but still want to keep your car, because they might be willing to offer payment holidays or reduced rates to be made up for later. However, there is no guarantee they’ll be willing to agree to this, as it’s potentially quite costly for the finance company to do so – especially if hundreds of thousands of consumers are in the same position.

Additional reporting by Darren Cassey

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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