A Guide to Cancelling Your Car Finance Early
If you are worried about being able to keep up with your car finance repayments or want to settle your agreement so you can sell your car, you do have the right to cancel most car finance contracts early.
Voluntary termination is your best option if it is available to you. The law slightly varies for Personal Contract Purchase and Hire Purchase contracts so read on to find out what to do in your situation.
In this guide:
- How do I cancel a Personal Contract Purchase (PCP) deal?
- How are the rules different for a Hire Purchase (HP) contract?
- What if I haven't paid back half of my finance deal?
- Can cancelling my contract negatively impact my credit score?
How do I cancel a Personal Contract Purchase (PCP) deal?
Usually, with a PCP agreement, you pay the deposit and then continue paying monthly instalments until the car is paid off. The car remains in the ownership of your lender during this time. Once the agreement has finished, you can either keep the vehicle by paying a balloon fee or you can return the vehicle.
After returning the vehicle you can either buy a new vehicle or begin another car finance deal to fund your new car. Before buying your new vehicle, do your research first so you don’t end up having to terminate your next car finance deal early as well. Compare car finance deals with Money Expert - calculate your budget, apply online and buy your new car!
However, it is fairly straightforward to return the car early if you have paid back at least half of the total agreed amount of your deal. This can catch some people out because the total agreed amount also includes interest, extra administration fees and the balloon payment - not just the amount you borrowed. This means it will probably take longer to reach the halfway mark than you would expect.
Once you have paid back half of the agreement you can then cancel the agreement. Bear in mind that if you have paid any more than half of the deal back, you will not be refunded by your lender. You need to work out whether cancelling the contract is still worth it if you are going to lose a significant amount of money.
What is a balloon payment?
A balloon payment is the last lump sum you pay back at the end of a contract. It is effectively leaving some of the cost until the end so you will probably have been paying lower monthly instalments before the balloon payment is made. The cost takes into account the value of your car at the end of the contract.
It settles your agreement so that you are now the owner of the car.
How are the rules different for a Hire Purchase (HP) contract?
The major difference with an HP contract is that you don’t pay a balloon cost at the end like with a PCP deal. This means that there are fewer extra costs on top of the amount you borrowed so you will reach that halfway mark faster - usually around halfway through the contract.
In the same way, you must have paid off at least half of the agreed amount to cancel the deal. Be aware that HP deals work by using the car as leverage, so if you don’t keep paying the monthly instalments of your deal then the car will get taken off you.
Also, bear in mind that the condition of the vehicle is important in both types of contract. When terminating the contract early, wear and tear is inevitable, but you will be expected to cover the cost of any repairs.
What if I haven't paid back half of my finance deal?
If you have currently paid back less than half of the total amount and you still want to cancel the contract early, there is a different option. You will have to pay off the remaining monthly instalments up to the value of half of the agreed cost.
Depending on how much difference you will have to pay, this option can be difficult for some people who cannot afford to cover the total cost in one go. For example, if the total agreed deal is £50,000 and you have currently paid back £15,000 then you will have to cover the extra £10,000 yourself to reach the halfway mark.
Can cancelling my contract negatively impact my credit score?
It is likely that a potential lender will be able to see that you have voluntarily terminated a contract in your credit history. This doesn’t usually affect your credit score and so won’t impact on you getting credit when you need it later on.
This makes voluntary termination a much safer option than carrying on with your contract when you aren’t sure if you can afford it anymore. Missing repayments or paying them late can really damage your credit score and is best avoided. It is likely that the lender will raise their interest rates if you start to miss payments which will increase the amount of credit you have to pay back in the end.
The lower your credit score, the harder it will be to get loans and finance deals in the future for important payments such as a mortgage. Therefore, voluntary termination is by far the best option in this situation.
However, using voluntary termination on a regular basis may start to bring your credit score down. A lender will lose money when you end a contract early so a new lender may be less inclined to start a car finance deal with you if you have a history of ending them early.