Buying a new car is one of the biggest purchases that many of us will make in our lifetimes. And if you don’t have the cash saved to buy a vehicle outright, you’ll probably be looking for a car finance agreement. While it can be a great way of splitting your costs into manageable monthly repayments, car finance is a big financial commitment. Not only does it mean you’ll need to find room in your budget for the payments, but you’ll also be tied to an agreement that will typically last between two and five years.
Nobody enters into a finance agreement expecting things to change, but life can be unpredictable. A loan that was once perfectly tailored to your circumstances can become unaffordable, or you may simply wish to change your vehicle.
The good news? If you need to end your car finance agreement early you do have options, including voluntary termination.
What are my legal rights?
Your right to voluntary termination is enshrined in UK law. Under Section 99 of the Consumer Credit Act 1974, you have the right to return a car on finance to the lender if you’ve paid at least 50% of the total amount payable.
This legislation is in place to help protect you and the finance company. It means that you’re protected if you can’t afford to keep up with your repayments and the lender can trust that borrowers aren’t able to just walk away from their obligations at any time.
The law applies to both hire purchase (HP) and personal contract purchase (PCP) deals for new and used cars. It covers any agreements issued since April 2008, even if you’ve splashed out and borrowed more than £25,000.
Once you’ve met the 50% criteria, you can choose to start a voluntary termination at any time before your last instalment is due. Unfortunately, you won’t get any money back if you’ve already paid more than half of the total amount payable and you might be liable for additional charges if you’ve damaged the car beyond everyday wear and tear.
Reasons for voluntary termination
Life is full of ups and downs. At Ocean, we understand that your circumstances can change over time and a car finance agreement that was the perfect fit a few years ago might now be a source of anxiety.
There are several reasons why you might choose to end your car finance early:
- You’re struggling to keep up with your repayments – if you’ve been made redundant, taken a pay cut, fallen ill, or recently expanded your family, you might find your budget can’t stretch as far anymore.
- You don’t need a car – maybe you’ve moved to a new city where public transport is more accessible, or you’ve chosen to become a one-car family.
- You think you could get a better deal – if your credit score has improved over time or your disposable income has increased, you might be able to find a loan with a lower interest rate. You may wish to voluntarily terminate your current agreement and take out another loan for a new vehicle.
People typically opt for voluntary termination of car finance when they’re in danger of falling behind with their payments. Financial pressures may mean you can’t afford to pay the settlement figure and sell the car. Or your credit score might not be strong enough to secure a refinance deal with a longer loan term and lower monthly payments.
In that case, you should contact your finance provider to discuss your options with them. Voluntary termination could be an option, rather than missing payments and potentially damaging your credit score. A voluntary termination shouldn’t negatively affect your credit score or your ability to get further finance (though, some lenders may ask for a larger deposit if they see this as a signal of higher risk). However, if you miss a number of payments, a default could be placed on your credit file, and you could struggle to secure finance again for up to six years as a result.
How does the voluntary termination process work?
So, you’ve decided that voluntary termination is the best option for you – what’s next?
First, make sure you keep making payments until your termination has been confirmed. Any payments that you miss will be marked on your credit file.
To start the voluntary termination process, find the amount you’ll need to pay or have already paid to end your agreement. This will usually be listed on your finance agreement paperwork in a box labelled, “Termination: your rights.”
Check how much you’ve already paid, including your deposit, any upfront fees, and your monthly payments so far.
Finally, let your lender know that you wish to exercise your right to voluntary termination in writing. It’s a good idea to keep a copy of this safe, just in case.
How long does voluntary termination take?
Don’t let the 50% condition confuse matters. There’s no need to wait until you’re halfway through your agreement to start a voluntary termination. It’s always 50% of the total amount payable, not the loan term.
With a hire purchase (HP) car finance agreement, you’ll usually hit the 50% point roughly halfway through your loan term, but with personal contract purchase (PCP) car finance, this point can come a lot later thanks to the large balloon payment you’ll usually pay at the end of your agreement.
Voluntary termination charges
While it doesn’t cost anything to terminate your agreement (assuming you’ve already covered 50% of the total amount payable), you might find that the finance company wants to charge you more based on the car’s condition.
Legally, you should only face voluntary termination charges if you haven’t taken good care of the vehicle. Normal wear and tear is fine, though, so if you’ve picked up a couple of small scuffs on your paintwork over the years, you probably won’t be charged. Of course, if your wing mirror is hanging off and your boot won’t open, the situation might be a bit different!
You can appeal the charges if you feel that they’re unfair and you can take time-stamped photos throughout your loan term so that you can prove you’ve taken good care of the car. The only other charges you could face are if you’re liable for any admin fees – double-check your agreement’s small print to make sure.
How do I start a voluntary termination?
All you need to do is send a letter. Make sure that you explain that you’d like to apply for voluntary termination with immediate effect. It’s good practice to ask how you should return your vehicle to them, too. As soon as the finance company receives your formal notification, your agreement will be considered terminated. Don’t worry; there’s no need to sign documents or fill out lengthy termination packs to start a voluntary termination.
Voluntary termination vs. voluntary surrender
One of the reasons you need to be explicit with the wording of your voluntary termination letter is to avoid it getting confused with voluntary surrender. When you surrender a vehicle, the lender will sell it and put the proceeds towards the loan, but you’ll still owe any balance outstanding. Voluntary surrender is viewed more favourably than repossession, but less favourably than voluntary termination. It will also be noted on your credit report and could make it more difficult for you to find finance in the future.
Does voluntary termination affect my credit score?
It might not seem like the ideal outcome right now, but one advantage of voluntary termination is that it won’t affect your credit score. A note will be left on your file, but it won’t say why you chose to end the agreement early and it won’t affect your credit score like missing payments would have done. Even so, it’s best not to get into the habit of voluntarily terminating finance agreements, as finance companies may interpret this as a signal of long-term financial difficulties.
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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.
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