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Every consumer who takes out a hire purchase (HP) or personal contract purchase (PCP) contract has the right to voluntarily terminate the agreement at any time.
Voluntary termination of car finance
We’ve put together this expert guide explaining exactly how you can cancel your car finance whilst also answering some of the questions that plague many people considering following the route of VT.
What Exactly Is Voluntary Termination?
Voluntary termination rights state that anyone taking out an HP or PCP might be able to cancel their agreement early, hand the car back and walk away from the contract. However, this only applies if certain circumstances are met, such as you being halfway through your payments. No car finance company is going to like the agreement being terminated early. Cancellation rights are something that is rarely explained properly by any car dealer.
That’s why we’re here to help.
When you take out a PCP or HP agreement, it’s set for a long period of time – usually a couple of years. Over the course of this time, it’s perfectly reasonable for your circumstances to change. Anything from losing your job to retiring, there is a multitude of things that can affect your ability to pay your monthly fee on your payment plan. When your circumstances do change, it can suddenly become incredibly difficult to make the payments on time or even at all.
Depending on your current situation car finance voluntary termination may be an option for you. This means you don’t pay anything more for the car and shouldn’t incur any penalties either.
Your Legal Rights With Voluntary Termination
As is the way when terminating a contract of any kind, you have legal rights. Car finance cancellation rights are no exception to that rule. Under the Consumer Credit Act 1974, Section 99, anyone who is currently in a regulated PCP or HP has the right to voluntarily terminate the agreement. To find out exactly what your rights are, take a good look over your contract documentation which should give you your rights in full detail.
This legal right and law have been put in place to protect you or any consumer who is finding it difficult to afford the monthly payments on their car. It also gives the finance company more protection to stop borrowers from walking away from a contract without any obligation to pay. This is done by setting a total amount payable, which is usually half-way through the agreement or when you have paid 50% of the total owed on the vehicle.
Understanding the Depreciating Value of the Car
Everyone is aware that as soon as a car leaves the forecourt, it immediately loses value. As time goes on, it continues to do so. During the first year of owning the car is when it will depreciate in value the most. In fact, in this time period around 40% of the total value of the car is lost. For the two years following this, an average of 20% is lost from the worth of the vehicle. Realistically at the end of the three years (which is usually how long an HP or PCP lasts), the car will have dropped almost 60% of the value it was when you first got it.
Looking at those figures and how significantly they drop, it may make it clearer that finance company should be compensated. When a car is returned at the end of a finance agreement the company generally sell them at an auction to try and recoup these losses.
Thinking about voluntary termination, if you break the agreement within a year of taking it out, you will have paid out less back to the company than the total amount the car value has depreciated. When you come to the end of a three-year agreement, the difference between those amounts is a lot less. In fact, you will most likely have covered the depreciation in value.
Finance companies have to make sure that the depreciation is factored into the contract. This is why in the Consumer Credit Act the 50% rule exists. It not only looks after the rights of the consumer, it also takes care of the company who are providing the finance.
The exploitation of the Safety Net by Consumers
Voluntary termination is there to protect you when you have a car finance agreement. However, there are some people out there that will choose to exploit this clause to cancel their PCP early if the numbers are looking more favourable than seeing out the agreement.
In most voluntary termination situations you won’t have paid off enough of the car’s original price to cover the depreciating worth of the car now. So essentially the finance company will have a car returned that is worth a lot less than the actual amount of outstanding finance owed.
As you may be able to understand, a finance company won’t be very happy about this at all. But there’s not much they can do to stop someone from doing voluntary termination because of the law protecting your consumer rights. This is usually why car dealers don’t tell you about the get-out clause. Having this veil of confusion suits them better, so you see the contract out without thinking there’s a way of escaping the payments.
The reality here is that if you go through the proper steps for voluntary termination, a finance company can’t do anything to stop you. Want even more great news? A voluntary termination doesn’t negatively your credit rating or credit score either. This usually only happens with a voluntary surrender of the vehicle. If you do decide that voluntary termination is the right option for you, it’s worth thinking about the fact that the finance company may not accept any applications from you in the future.
How Does Car Finance Voluntary Termination Actually Work?
When you want to end your finance agreement and give the car back to the company, there are certain criteria that have to be met. The first is that you have to have repaid at least half or 50% of the Total Amount Payable. Be careful to note that this isn’t the amount borrowed because any interest and feeds you have incurred will also need to be included. It also does not apply to pay half of your scheduled payments each month.
Another thing you will have to look out for when trying to achieve voluntary termination is car damages. If the vehicle hasn’t been taken care of properly, aside from the usual wear and tear a finance company would expect, you won’t be able to end the agreement early.
Complying with both of these criteria means you can voluntarily terminate the HP or PCP agreement. Normally you won’t have to pay anything further if you do this. The amount payable at the end will be the total amount of money you borrowed plus fees and interest added on the top. A PCP also includes a Guaranteed Future Value. This total amount can be a lot of money, meaning that in a PCP you don’t usually reach the point of being able to voluntarily terminate the contract until later on in the agreement. When you hit the halfway point, due to the high amount of money being owed it’s incredibly unlikely that you will have paid off half of the PCP total amount with the standard monthly payments.
If you have an HP instead of a PCP, the 50% halfway point is normally reached halfway through the agreement term. When you receive your finance contract for the car, the total money you have to pay back should be clearly stated and easily found. With many contracts, there will be a termination amount. If you want to have a voluntary termination of an HP or PCP this amount will need to be settled before the contract is ended. This rule is true whether you have a brand-new car or one that is pre-owned. The law will always stay the same for any situation.
When it comes to damages, it can be very confusing and vague with each finance company out there. We’ll look at damages and fees you may incur further on in this guide.
Where Do I Start With a Voluntary Termination?
Making the decision to go through a voluntary termination is never an easy conclusion to come to. Unfortunately, the finance company won’t make the process any easier either. They don’t like you leaving the contract before it’s completed and many companies have fought for the clause to be removed from the laws. If you get in touch with your finance company looking for help with a voluntary termination, you’ll more than likely be met with little to no interest at all.
A finance company will try to drag out the process so that you continue to make payments in the meantime, meaning they recoup more of their money. You’ll probably have to put in a lot of the leg work as well. You will continue to make the monthly payments up until the day the agreement is terminated, which is why the whole process is stretched out as long as possible.
The second problem you may run into is the damages clause in the contract. If you haven’t taken what the finance company deems to be reasonable care of the vehicle, these damages will have to be paid for. Normal wear and tear are taken into consideration, but different companies have different meanings for what ‘normal’ actually is.
Because of all of these things, the finance company will try to get as much money out of you as possible before the agreement comes to an end. Any damages that they don’t deem to be reasonable, whatever that criteria might be, will be charged to you. There is also often an extra clause for excess mileage to try and pin even more charges on you during a voluntary termination.
The letters and invoices you receive during voluntary termination may be enough to put you off going through the process. Legal jargon they use has been designed to scare you, ensuring you pay up even if you only have minor damages and petty charges for excess mileage.
To get some great advice, try Legal Beagles voluntary termination forums. They have some of the best free advice out there on documenting the current condition of the car with photos that are dated. They can also help you to prove that the vehicle is in good condition when you go to hand it back to the finance company.
A very important thing to remember is that a finance company should not be able to charge you any excess mileage payments. They might try, but to find out how to avoid these charges check out the section later on in this guide.
If, during the term of the agreement, you have defaulted on any of the payments the finance company is more than within their rights to refuse your voluntary termination request. When planning to cancel a PCP or HP early, you have to think about it carefully in advance. You shouldn’t just stop making the monthly payments because you want to terminate the agreement. Go into it knowing your legal rights and come at it from a strong position. You don’t want the finance company turning around and charging you through the nose because you’ve missed payments.
When you know that your current financial situation is unstable and it’s not likely to get better in the near future, act early and be decisive about what you want to do. Letting your situation carry on and collapse to a point where you can longer pay any of your bills could result in you not being able to carry out a voluntary termination at all. This is where you will have to go for a voluntary surrender, which can seriously affect your credit and should be avoided at all costs. To get started with a voluntary termination, write a letter to your finance company or call them. There’s a great template from Legal Beagles you can use to get the ball rolling.
Starting a Voluntary Termination
First of all, you need to get in touch with the finance company. The best way to do this is in writing, so there’s physical evidence. Be very clear in what you want in your voluntary termination. You should refer to the terms that are set out in your specific contract and also cite the Consumer Credit Act 1974 to legally back you up. For best results use our template here.
It’s so important to be very clear that you want a voluntary termination and not a surrender.
Any unclear language will lead to company to misconstrue the meaning of your letter. Going through a voluntary surrender means the company gets the car back as soon as possible. You will still owe the total amount due. The car gets sold at auction, adding on any extra costs for the removal and consequent sale of the vehicle. These charges plus everything else you owe is all added together and the finance company come after you to pay the debt in full.
A voluntary surrender really is the bottom of the barrel, and a scenario you don’t want to go through. The finance company will continue to chase you for the money even though you don’t have the car anymore.
What Do I Need to Sign To Start a Voluntary Termination?
All you have to do is send in your letter, signed and dated with your name. You could also send in an email, but posting it via recorded delivery is much better and safer. The finance company may choose to send you a voluntary termination pack full of termination documents for you to sign. Don’t fill this out! They may insist that it is necessary, but it isn’t and often it’s a trap that gets you to sign away any legal rights you have.
I Have A Car Lease. Do I Have Rights for VT?
Because there are so many different kinds of car finance, not all of them are protected under UK law. If you have a leased car such as an operating lease agreement or a contract hire car, then the voluntary termination options you have are incredibly limited.
Getting out of your lease agreement early can be really expensive, and there’s not much legal backup to help you out. When you’re hiring a car there’s no end option of owning it outright. The car is always going back to the company. This means that any rights that apply to PCP or HP agreements don’t apply to leased vehicles.
Finance companies are now making car lease agreements more prominent than HP or PCP contracts. They are promoting these more because there are no voluntary termination rights with these kinds of agreements. When you are taking out a finance agreement, the rights for a voluntary termination will be clearly stated in the paperwork. Before you sign on to any type of contract, make sure you know exactly what rights you are being offered before you sign your name.
Will My Credit Be Affected By a Voluntary Termination?
When you first start to research voluntary termination, a common theme that runs through most advisory boards and forums is the effect it has on your credit rating or score. All you need to know about voluntary termination and credit is that it should not be affected in any way, shape or form. All you are doing when you undergo a PCP or HP voluntary termination is exercising your legal right to end the agreement early for financial reasons.
Once again, your credit rating won’t be affected.
Or at least it shouldn’t be affected, as the law states, and Black Horse kindly ignored in my case.
Terminating the finance agreement early will be shown on your credit record. On this record, there won’t be any details of why the contract was terminated early. It’s not uncommon for people to voluntarily terminate their HP’s and PCP’s, no matter what a finance company may tell you otherwise.
The tables can be turned, where an agreement is terminated by a finance company and not by you. This happens more than you might think during accommodation deals. You have the right to reject a vehicle under the Consumer Rights Act. Any finance agreement that goes with that car will be terminated at the same time. Finance companies put up multiple reasons why they cancel a contract early and you also have a number of reasons why you are cancelling too. These reasons not being listed on your credit report should not have any bearing on you being able to obtain finance in the future.
Finance companies that see your credit record in the future will see that you have voluntarily terminated an agreement in the past, but they won’t see the reason why you did it early. Future applications for finance or loans shouldn’t be affected by a voluntary termination. Any credit card, mortgage or personal loan applications won’t be affected either.
The only thing that may be affected is your ability to obtain finance from that specific finance company again in the future. Whatever company you have the finance with, when you cancel it they may decline any future applications you put in. Their records will always show that you ended an agreement early, making it much less likely they will give you a loan or any money towards another car in the future.
Excess Mileage Charges – Will I Have to Pay Them?
Excess mileage charges are a huge hot button when it comes to voluntary termination of a finance agreement. The reason these clauses are put in place is that the value of the car will be directly associated with how many miles it has on the clock.
A mileage clause is usually more common on a PCP agreement. All of your monthly payment amounts plus the balloon payment at the end of the contract will be determined by the mileage you put on the car. Undergoing a voluntary termination of the PCP contract on a car that has mileage over the amount you estimated it would do when the agreement started means the finance company loses out on much more money than initially anticipated.
Isn’t there a law about this charge? In short, no, there isn’t. There are no laws that state an excess mileage is enforceable.
This means you cannot technically be charged if you go over your mileage allowance. Exceeding your initial mileage allowance means that the finance company will usually come after you though.
This is a charge you do not have to pay. However, if you refuse to pay it there will be a fight on your hands. The process can last for months, and the finance company may even threaten legal action against you if they can’t recoup their costs. Remember that the legal community has determined excess mileage charges do not have to be paid. This doesn’t mean that the finance company won’t try everything in their power to get the money out of you though.
A finance company will have dogged determination to get a payout. Usually, this works because they scaremonger customers with legal jargon, threatening letters and contact from legal firms. All of this is a complete bluff, but it doesn’t mean it isn’t uncomfortable for you.
Of course, there are always those that will exploit this excess mileage clause of a PCP agreement, going into knowing full well that a finance company can’t enforce the payment. Signing the contract in the first place agreeing to a low amount of miles keeps the payments down. However, driving a large number of miles per year really drives down the value of the car during the term of the agreement. When this customer decides to voluntarily terminate the contract, the finance company are left with a huge amount of excess mileage they can’t charge for. This is exploiting a legal loophole that the financiers absolutely hate.
A finance company won’t take you to court if you don’t pay the charges for any excess mileage, regardless of the threats they are making. Stick to your guns and seek out legal advice on the matter before you give in and make the payment.
Remember that excess mileage charges only apply to PCP agreements. If you have an HP, you don’t have to worry about any sort of mileage fees.
In Summary
This guide was given in the hope that it helps you navigate the world that is voluntary termination. In no way was it intended to help you take advantage and exploit the rights set out to you by UK laws. Voluntary termination isn’t there to help those who just can’t be bothered to pay for their car anymore.
When you take out any kind of finance, make sure you can comfortably make all of the repayments before signing on the dotted line. If you can’t afford the total amount value, you shouldn’t be purchasing that car.
We know that circumstances change and that this may leave you unable to make the minimum monthly payment on the car. A finance company may be able to give you options on making smaller payments or taking a payment break. If you have paid out more than half of the total amount owed on the car, you can voluntarily walk away from the contract.
Going down the path of a voluntary termination should only be done as a last resort. The continued exploitation of the safety net surrounding voluntary termination may lead to the government taking away our rights altogether. So, use them wisely and don’t abuse them so we can keep our consumer rights as fair as they are now.