One of the most misunderstood aspects of car finance is how you can end your agreement early if you need to. This post will look at a consumer right that is built into every regulated personal contract purchase (PCP) car finance agreement – your right to voluntary termination (VT).
Voluntary termination of a PCP is the legal right of a borrower (you) to cancel your finance agreement early and walk away in certain circumstances. Car finance companies don’t like it, plus it is usually explained poorly (or not at all) by dealers.
Often people’s circumstances change over the course of a car finance agreement:
- They can lose their jobs
- Personal circumstances can change
- Unforeseen factors can make it difficult to keep up with their monthly car payments
Depending on the circumstances, you may be eligible for voluntary termination of your car finance agreement.
We will explain what a voluntary termination is, why it exists and how to go about cancelling your agreement by voluntary termination. We’ll also answer a couple of the most common questions about voluntary terminations:
- Will a voluntary termination of a PCP affect your credit rating?
- Can you be charged for excess mileage?
UK law provides you with the right to voluntarily terminate a regulated HP or PCP agreement (Consumer Credit Act 1974, Section 99). Your contract documentation will detail your rights.
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.
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 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 which is worth less than the outstanding finance amount.
Understandably, finance companies do not like this exploitation one bit. But there is nothing they can do to stop it as the law protects 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.
How voluntary termination works
You can end your agreement and return your car to the finance company as long as:
- You repay 50% of the Total Amount Payable (not the total amount borrowed, as you need to include interest and fees)
- There are no damages if you have failed to take reasonable care of the goods (over and above normal wear and tear)
Assuming you have complied with both of the above, you’ll have nothing further to pay.
The Total Amount Payable is the total amount borrowed plus interest and fees. It also includes the Guaranteed Minimum Future Value (GMFV) on a PCP. This means that you usually don’t reach the voluntary termination point until very late in a PCP agreement. For an HP agreement, you will usually reach the 50% repayment point about halfway through the agreement.
The Total Amount Payable must be clearly shown on any car finance contract, so you should be able to find it easily enough. You must pay off half of this figure to enact a voluntary termination of a PCP or HP.
It makes no difference if you bought your car new or used; the law is exactly the same for both.