DRIVESMART: Ending Car Finance Agreements Early

Can you escape from car finance repayments?

Ending Car Finance Agreements Early

20 October 2020

Are you struggling to make your car finance payments?

We explain how to end a car finance agreement early.

If the current challenges from COVID-19 have left you in difficulty meeting your car finance commitments then UK consumer law may just lend you a hand.

The Financial Conduct Authority has already intervened to provide short-term help for car finance.

The temporary relief allows repayments to be suspended and avoids borrowers being penalised by moves in used car values (which could affect Personal Contract Purchase and Personal Contract Hire agreements).

Whilst the temporary arrangements are welcome, what if your circumstances have changed significantly or the temporary assistance won't cover you?

Well, in the right circumstances you can hand back a car bought on finance in order to clear your debt.

So how do you qualify?

In our Blog post we explain how you can cancel your finance agreement without harming your credit score.

Should I Really Be Handing My Car Back?

It seems like an obvious point, but before resorting to handing back your car you should of course consider the consequences, not necessarily just the financial ones, but the practical implications for you (and your family too).

During the current COVID-19 challenge, Government advice about travel hasn't exactly been consistent, in particular for travel to work, and especially on the use of public transport.

Getting rid of your car may leave you (and your family) exposed to the risks of travel on public transport which, in the current environment, have been acknowledged generally as a health 'challenge'.

But if you have weighed up the pros and cons and can't find an alternative to handing back your financed car, how do you go about it?

Where Do I Start?

Well, first you need to get out the agreement you signed to finance the car.

This document is important, not just for setting out all the fine print on terms and conditions but for stating the basics too.

Your finance agreement will state whether or not it is regulated or non-regulated.

What that means is whether the finance agreement is controlled by the Consumer Credit Act 1974 ('CCA74'), the main piece of legislation covering finance agreements by members of the public (as opposed to business and commercial finance).

For most private individual car buyers, a car finance agreement that you took out through a car dealer will be regulated under CCA74 - there are some exceptions and that's why you need to check.

Assuming your agreement is regulated, you have the right to terminate the agreement early, subject to certain conditions, and this is known as a 'voluntary termination'.

How Does Voluntary Termination Work?

Voluntary termination of a regulated Hire Purchase agreement allows you to hand back the car as long as you have paid at least half the amount you borrowed.

Due to complexities in how car finance payments are structured, to work out whether you have already paid off half the original borrowing you will need a 'settlement figure' from your lender.

The statement accompanying your settlement figure will confirm how much you originally borrowed, how much you have repaid so far and the balance still to pay.

As long as you have already repaid at least 50% of the amount you borrowed then you can simply hand back the car to the finance company and the agreement is over.

Although that sounds simple, do keep in mind that you must have looked after the car so that it is in a condition appropriate for its age and mileage - if the car has been damaged (other than minor 'fair wear and tear') you must put this right before you can hand back the car.

If don't qualify because you haven't repaid 50% yet, you can pay the difference to the finance company to bring you into qualification.

On the other hand though, if you have paid more than 50% of what you borrowed you won't get back the difference.

For example:

You borrowed £20,000 to finance a car on a regulated Hire Purchase agreement.
You have already repaid £11,000 so far in your finance payments
Although you have already repaid more than 50% the 'excess' £1,000 is not refundable on voluntary termination.

Is Voluntary Surrender The Same?

No.

Voluntary surrender is not the same as voluntary termination and you must make it clear in any documents you send to your lender that you are enacting voluntary termination.

In voluntary surrender you are simply handing back the car to the finance company and in that case you are liable for special charges to end the agreement.

What Will Voluntary Termination Cost?

There are legal restrictions on what the finance company can charge you for voluntary termination of your car Hire Purchase agreement.

The voluntary termination charges are the lowest of the following:

1% of the amount remaining from the original borrowing (e.g. for £10,000 left to pay, a £100 charge).
0.5% of the amount remaining if there are less than 12 months left on the Hire Purchase agreement (e.g. a £50 charge for £10,000 left to pay).
The remaining interest you would have paid.
Nothing, if the balance of the agreement is below £8,000.

Will Voluntary Termination Affect My Credit Score?

No.

Your credit score is based on other factors such as your payments history, so settling a finance agreement early should not count against your credit score.

But because voluntary termination can be abused, do beware that lenders will look at your history of voluntary terminations when considering future lending.

If a lender sees regular voluntary terminations of Hire Purchase agreements (which basically costs lenders money) then they may be less likely to lend to you in future.

What If You Can't Afford Voluntary Termination?

If you;

haven't reached the 50% threshold for voluntary termination;
can't make a payment to reach the threshold; and
can't afford to continue to make your repayments

then you should speak first to Citizens Advice who can advise you on your rights as a borrower for your specific agreement.

If your problem involves more than one lender or other debts in addition to car finance then Citizens Advice may also be able to come up with a debt management plan to deal with what you owe.

Also, if your repayment problems arise from COVID-19, such as lower or suspended wages due to furlough or lock-down, do check the special arrangements put in place by the Financial Conduct Authority.

What About Leasing?

If your finance agreement is a personal contract hire plan then the early termination rules are different to Hire Purchase.

Click on the link above for more details.

For personal contract purchase the same rules apply as those above for Hire Purchase, but with additional requirements about the condition and mileage of the vehicle (check your finance contract for details).