Car finance agreements can last anything up to five years, so a lot can change in that time. A voluntary termination is there to protect your interests for when your circumstances change.
What is a voluntary termination?
A voluntary termination is a way for you to legally end your financial relationship with a lender.
It’s your legal right to do this when you’ve entered into a PCP (Personal Contract Plan or Personal Contract Purchase) or a HP agreement (Hire Purchase agreement) but doesn’t cover PCH (Personal Contract Hire) or operating lease deals.
The right to voluntary termination stems from legislation contained in the Consumer Credit Act 1974, Section 99 and is there to help protect those who’ve taken out a finance agreement, but have become unable to afford their monthly repayments.
Voluntary termination is generally not that well understood, but if you want or need to end your car finance early, it can be used to do just this and we’re going to explain how.
Why would you need a voluntary termination?
When you take on car finance, you commit to making monthly repayments over a certain number of years. However, things can always change over the length of the term and if your finances are affected, you may no longer be able to afford to keep up with your payments.
This is when a voluntary termination might be the right option. So for example, if you’re made unexpectedly redundant and experience a drop in income, a voluntary termination could protect you and help you avoid getting into further financial trouble.
Other instances where you may want to end your car finance agreement early are if the car no longer suits your needs – maybe you need something bigger for a growing family – or if you want to change to a different model.
Although, in these cases, you’re probably better off part exchanging it and taking a new deal.
How does voluntary termination work?
If you need to end your car finance agreement earlier than expected, voluntary termination means that you’re entitled to apply to cease your car finance without further charge.
This is on the proviso that you’ve paid, or are prepared to pay, 50% of the total amount payable on your PCP or HP deal.
This amount needs to include both interest and fees. You can find the Total Amount Payable (TAP) and the settlement figure in your car finance agreement, and you must pay off the termination amount (50% of TAP) to end the finance agreement early.
One important thing to note is that if you’ve defaulted (missed) any payments during the term of your agreement, it’s within the finance company’s rights to refuse a voluntary termination request.
Another stipulation to a voluntary termination is that you return the car with no damage, over and above normal wear and tear.
However, the rules vary slightly depending on whether you have Personal Contract Purchase (PCP) or Hire Purchase (HP).
Voluntary termination PCP
As long as you’ve paid off 50% of the total finance amount, you can ask for voluntary termination of your PCP deal.
This’ll include interest and fees and the balloon payment (the payment that is paid at the end of the term if you want to keep the car).
This is something you need to consider, as it’s not simply a case of getting halfway through your agreement – that lump sum will have to be paid too.
If you haven’t paid off 50% of the total finance amount, it doesn’t mean you can’t request voluntary termination. You will, however, have to pay the difference to make it up to the 50% point.
On top of this, you must return the car in good condition with no damage, other than normal wear and tear.
The finance company will also still expect you to pay for any excess mileage that you may have exceeded above and beyond the terms of your contract.
Voluntary termination HP
Hire Purchase agreements can be ended early, as long as you’ve repaid 50% of the total finance amount. This is usually halfway through your term.
If you haven’t paid back 50% of the total finance amount, you can still ask for voluntary termination, but you’ll have to make up the difference.
The car must be returned in good condition with no damage, other than normal wear and tear.
How long does voluntary termination take?
The amount of time voluntary termination takes to process varies depending on the finance company and the circumstances surrounding the termination.
All the requirements need to have been met – you’ve repaid 50% of the Total Amount Payable, there are no damages to the car and (in the case of PCP deals), excess mileage has been paid.
If you’ve met all these obligations, then the process should run relatively quickly.
How to end a car finance agreement early
Finance companies generally dislike voluntary terminations. They cost them money and, in the case of hire purchase, where mileage is unlimited, the value of the car given back may be considerably less than what the car is worth.
As such, some of them can try to string out the process or make it seem difficult to do. Be careful of signing ‘termination packs’ as well as they can have hidden clauses where you may sign away your voluntary termination rights.
To request to end your car finance agreement early, it’s best to write to them, stating that you want to complete a voluntary termination under the Consumer Credit Act 1974, Section 99 and state the date. It’s a good idea for you to send this via registered post and follow it up with an email.
If you wish to end your agreement early and keep the car, the voluntary termination route is not the way to go, as it’s specifically for those who can’t afford the remaining repayments and therefore must hand the car back.
If you want to keep the car, you can pay an early settlement fee. A settlement fee allows you to pay off any remaining finance including the additional interest, fees, and balloon payment (if applicable) in one single lump sum.
Once you’ve paid the settlement fee, you’ll be the legal owner of the car.
Voluntary termination versus voluntary surrender
Yes, they sound similar, but mix these two up and it could be costly. Voluntary surrender is when you are unable to make the loan payments and so the finance company is taking the car back, which you are voluntarily agreeing to.
The car is then sold at auction and you’ll have to pay off the remainder of your balance plus any fees.
To avoid any confusion, ensure you’re clear in your letter to the finance company stating that you are exercising your legal right to voluntarily terminate your car finance agreement as per the Consumer Credit Act 1974 and as set out in your contract.
Will voluntary termination affect my credit score?
While voluntary termination may show up on your credit report, it’s unlikely to affect your credit score or your ability to get finance in the future.
If you’re struggling to keep up with your car finance repayments, voluntary termination is a better option than simply falling into arrears.
If you fail to make payments, at best you may be hit by late payment fees or increased interest charges.
At worst, you could default on the loan and this would have a significant impact on your credit score and potentially affect any future borrowing you may want to make.
Voluntary termination: things to consider
Under the Consumer Credit Act 1974, it’s a statutory right that you can terminate your PCP or HP car finance agreement early, as long as certain conditions are met.
In order to cancel your car agreement early, you must have repaid 50% of the Total Amount Payable. For example, if the Total Amount Payable is £60,000 and you have only paid £20,000, you’ll have to pay a further £10,000 in order to voluntarily terminate your agreement.
You’ll only be able to enact voluntary termination if the car is returned in good condition with no excessive damage.
If you’ve missed any repayments during the term of your agreement, your finance company can refuse your right to enact voluntary termination.
Voluntary Termination doesn’t apply to pure leasing or hire situations such as PCH.
If you wish to terminate your agreement early, write to your finance company informing them and then hand the car back.
Voluntary termination is not the same as voluntary surrender, so be careful because confusing the two could cost you a lot more money.
What to do if you’ve voluntarily terminated your car finance but you need a new car
Have you had a voluntary termination in the past and are now worried you may not be accepted for car finance?
Hippo Motor Finance works with specialist lenders who can help you find a finance option to suit you.
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