How to get out of a car finance agreement
Under UK law, you have the right to cancel some types of car finance agreements early. This is called voluntary termination. Section 99 of the Consumer Credit Act says that in some circumstances you can voluntarily terminate a regulated HP or PCP agreement. This covers both new and used cars. The law is designed to protect people who might have taken out a finance agreement, but for one reason or another can no longer afford the monthly repayments. Though the law covers both PCP and HP agreements, they are both slightly different in how they work - read on to find out how both work, and how you can terminate them.
In This Guide:
- Common reasons for cancelling a car finance agreement
- What is PCP (personal contract purchase) finance?
- How do I end my PCP agreement early?
- What is HP (hire purchase) finance?
- How do I end my HP agreement early?
- Can I cancel my car finance with more than half of the balance outstanding?
- Can voluntary termination impact on my credit score?
- What should I know before I apply for car finance?
Common reasons for cancelling a car finance agreement
There are a number of reasons why you might want to leave a car finance agreement. As a credit agreement that involves regular monthly payments, any change in your financial circumstances could affect your ability to maintain the commitment. Equally, you may find that you no longer have any use for the car you used the finance plan to acquire.
Whatever your reason for wanting to get out of your car finance agreement, how you actually do so will depend on the type of plan you took out. Different rules apply for personal contract purchases and hire purchases.
What is PCP (personal contract purchase) finance?
PCP is an incredibly popular option for car finance agreements, thanks to its flexibility. You get to choose the car and decide how long you want the term to be. Under a PCP agreement, you must pay an initial deposit, then a series of monthly repayments. After these repayments end, you can choose whether you want to own the vehicle or not. If you do, then you’ll have to pay a ‘balloon payment’ to buy the car. Once this is paid, the car is all yours. But if you don’t want the car, you can hand it back. Once you’ve done this, you can choose to start another PCP agreement. Another option is to part exchange the car, so that you can use the equity as a deposit on a new car.
How do I end my PCP agreement early?
Your PCP agreement can be voluntarily terminated as long as you’ve paid at least 50% of the total finance amount back to the finance company. The total finance amount includes any interest and fees that you need to pay as well.
Most importantly, this total also includes the balloon payment. This is crucial because it means that you likely won’t have paid back 50% of your total finance agreement midway through your monthly repayment schedule.
As well as having repaid 50% of the total finance amount, you need to have taken good care of the car, meaning there’s no damage other than general wear and tear. If you want to know exactly what is considered to be acceptable condition, you should refer to the fair wear and tear guide, issued by your finance company. To protect yourself against potential damage charges, you should take dated photographs of the car when you hand it back.
If you have these boxes ticked, then you’re all clear to cancel the agreement. However, if you haven’t repaid 50% of the total finance amount, you can still end the agreement if you pay off the difference. So, if you’ve paid back £15,000 out of a total of £40,000, you would have to pay off £5,000 to terminate the agreement.
What is HP (hire purchase) finance?
Hire purchase is another popular option for car finance agreements. With this sort of agreement, you normally have to pay an initial deposit of around 10% of the total cost. This is then followed by monthly repayments. When you’ve finished your monthly repayments, you then gain ownership of the car. There is no ‘balloon payment’ required to own the car, unlike with PCP agreements. However, there is a small Option to Purchase fee that covers the admin required to transfer the title of the vehicle to your name. HP is a secured loan, so it is tied to your car. Therefore, if you don’t keep up with repayments, your car can be taken away.
How do I end my HP agreement early?
Just the same as you can end a PCP agreement early, you can also end an HP deal early. Like PCP, you need to have repaid 50% of the total finance amount. However, because there is no ‘balloon payment’ included in the total finance amount, you normally reach the 50% repayment mark bang on halfway through your monthly repayments.
Again, just like PCP agreements, if you haven’t repaid 50% of the total finance amount then you can make up the difference, allowing you to then cancel. The same rule about the car being in good condition also applies to HP agreements.
Can I cancel my car finance with more than half of the balance outstanding?
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 voluntary termination impact on my credit score?
A voluntary termination of a car finance agreement can indeed appear on your credit file. However, it’s not likely to have any impact on your credit score, or your ability to get finance in the future.
If you can’t keep up with your monthly car finance repayments, you might be tempted to simply stop paying. However, this will only make the situation worse by harming your credit score, making it harder for you to borrow money in the future. You could also be hit with bigger APR charges. So, if you’re struggling to keep up with payments, voluntary termination is likely the best option to keep your credit rating high and your debt low.
It’s important to remember that voluntarily terminating your car finance agreement won’t get you any money back. So, if you’ve paid 65% of the total finance amount, you won’t get the 15% extra that you’ve paid refunded to you.
What should I know before I apply for car finance?
As a rule, always read the small print before you enter into any finance agreement. Some lenders charge extra fees for you to cancel early, so it’s best that you check this out from the get-go. Terms like these will be detailed in your contract or SECCI agreement.
Always shop around before applying for car finance, to make sure you’re getting the best deal possible. Here at Money Expert, we can help you compare car finance deals to make sure that you’re getting the most for your money.