How to get out of a car loan
People look to get out of their car finance agreement for many reasons. Their personal circumstances may have changed, perhaps they have recently divorced or been made redundant, or their needs have changed like having a new baby or needing a car suitable for transporting their pets etc. They may even just fancy a change and not want to wait until the end of the contract period. Whatever the reason, there are some key considerations that you will want to check out before parting with your current financed car though, in many cases, it’s very achievable – even if there might be a price to pay.
What finance is your car loan?
Firstly, the type of finance you have will affect your options when it comes to getting out of a car loan. The first step is to confirm exactly what type of finance you have, is it a Personal Contract Plan (PCP), a Hire Purchase (HP) agreement or did you finance it using a Personal Contract Hire (PCH) agreement.?
PCH is the purest form of leasing in that you will never own the car but pay a monthly amount to have use of it, while a PCP agreement gives you the option of handing back the car at the end of the agreed term or the option of paying a balloon payment and buying the car.
HP is the most traditional form of finance, you pay an agreed monthly amount over a set period and, at the end, the car is yours.
Getting out of PCP and PCH finance
Getting out of the first two types of finance is easier than the last. With PCP you can either ask the finance company for a settlement amount, pay it (you may finance this elsewhere as well) and then you can sell or trade in the old car for a new one. Because of how depreciation works, you are likely to have negative equity in the car however, which means that the car will be worth less than you owe because the value of the vehicle is designed to be in balance with the value at or near the end of the agreed loan term. This means you are likely to get back less than you owe unless you are near the end of your agreed PCP term though there is likely to be a small upside from recovered interest.
Terminating an HP loan
It’s pretty much the same with HP, you can get a settlement figure at any time but unless you put in a large deposit up front or have a rare, desirable car that holds it value very well then you are probably looking at a negative equity position.
The rule of half
There is another way that you could consider to get rid of the loan if it’s under PCP or HP terms. It’s called the “rule of half” and means that once you have paid 50% of the loan (including fees and interest) then you can voluntarily terminate, effectively hand back the vehicle without any negative effect apart from a note on your credit file. This note is unlikely to affect your ability to get finance in the future unless you are a repeat user of voluntary termination where lenders might not be so keen to finance though this is very rare. Please remember that if you go over the 50%, say you have paid back 70% and then voluntarily terminate, you don’t see any benefit from the additional 20% and this is all upside for the finance company- not you – so if you are going to voluntarily terminate its best to do so when 50% has been paid off.
Personal Contract Hire is different however in that this agreement is very much like hiring a car for a defined period in that you will never own the car or have the option to buy it. Getting out of a PCH deal is much harder though the term period of the agreement is likely to be less, mostly 2 or 3 years, and the advantage with PCH is that monthly outgoings are easy to manage plus, provided you keep the car in good condition and don’t exceed the annual mileage allowance you can swap to a new agreement easily at the end. PCH does not have voluntary termination rights so this should be taken into account when taking out the original lease and if you think you might tire of your car in the future, look to sign a short one or 2 year deal rather than a longer PCH deal.
Passing finance onto someone else
Please note that there is an increasing trend for companies to advertise that you can pass your lease agreement onto another person. In theory, this is a great solution where both parties benefit in that the original person gets rid of their car and the new person taking over the agreement is likely to benefit from not having to pay a deposit and a reduced agreement period. In some cases, the original customer is encouraged to ‘sweeten’ the deal by throwing in a sum equivalent to a few monthly payments. Unfortunately, not all finance companies agree to this solution and in many cases, the terms and conditions of the original agreement are designed to prevent this and you would be in breach of your agreement if you go ahead without consulting the finance company and getting their agreement.
In summary, some finance agreements are easier to get out of than others with PCH being particularly harsh on those looking to leave early. The ‘rule of half’ applies to PCP and HP deals but make sure that you don’t have a huge negative equity in the case of PCP and make sure you don’t get hit with extra bills like excess mileage charges. In the case of HP deals if you want to use the ‘rule of half’ then look to do this at the 50% mark.
Fancy a change in cars? Hippo Motor Finance offers part-exchange on your existing car and we’ll settle any existing finance, with positive equity going towards a deposit. Apply for finance today.