What is voluntary termination?
Under the Consumer Credit Act 1974, you have a legal right to end a car finance agreement (either a personal contract purchase or a hire purchase) early, as long as certain conditions are met. It is a statutory right and as such, it can not be restricted or excluded within the terms and conditions of any car finance deal.
In This Guide:
- Reasons for voluntary terminations
- How voluntary termination works
- How do I enact a voluntary termination agreement?
- What if something goes wrong?
- Voluntary termination versus voluntary surrender
- Voluntary termination and your credit score
Reasons for voluntary terminations
There are broadly two main reasons why you might want to leave your car finance agreement early. First, your financial circumstances might have changed and you might no longer be able to afford to keep up with repayments. In this case, straightforward voluntary termination could be the right option.
Alternatively, you might want to cancel your car finance agreement because you want a new car. Maybe you're tired of the one you've got, or maybe you've just got your eye on a different model. In this case - so long as you have equity in your car - you might be better off paying off the remainder of your finance plan to take full ownership of the car and trade it in.
How voluntary termination works
You will only be able to enact voluntary termination if there is no excessive damage to the car upon its return. Anything above general wear and tear is seen as excessive damage.
If your agreement is voluntarily terminated then you are responsible for paying off half of the Total Amount Payable as set out in your contract. The Total Amount Payable includes the amount you borrowed, plus interest. In some cases, it may also include the price of Guaranteed Future Value.
This amount doesn’t include any late payment fees or arrears you may have accumulated.
As long as there is no damage to the car and you pay back 50% of the Total Amount Payable, then there should be nothing left for you to pay.
How do I enact a voluntary termination agreement?
A voluntary termination can be used at any time within your contract, although it is typically done past the halfway point of your agreement. All you need to do is inform your dealership that you wish to use voluntary termination in writing. This can be done via email or through a signed letter.
What if something goes wrong?
When trying to use your right to terminate you may run into a couple of issues:
Unhelpful Finance Companies
The main issue is usually that finance companies and car manufacturers don’t like voluntary termination. They won’t willingly guide you to this option and won’t be much help if you try to enact it.
This has lead to many peoples’ experiences with voluntary termination being confusing and drawn out. This is because finance companies make customers run around and draw out the process in the hopes that the customer will give up.
The Vague Damage Clause
Another thing to look out for is the damage clause. This clause is vaguely written. It states that there can’t be any damages if you’ve failed to properly look after the car, over and above normal wear and tear. However, you’ll find that there is no definition of wear and tear in the clause.
Finance companies will try and use the damage clause as a loophole to claim for damage that they would consider unreasonable care. They may also use this clause to try and get you for the excess mileage, which they deem as unreasonable care, and will try and charge you for it.
So make sure you document the condition of your car all the way throughout your lease. The best way to do this is with dated photos. That way you can prove your car was in a reasonable condition when you handed it back.
Finally, if you have previously missed repayments then finance companies can refuse your right to enact a voluntary termination.
Voluntary termination versus voluntary surrender
Though they sound the same, the way these processes work are totally different. When writing your email or letter saying you want to enact voluntary termination you must be clear and forgo any confusion.
Finance companies have been known to confuse or deliberately misunderstand the two. As such, if your request gets taken as voluntary surrender you will have to pay off the remainder of your balance in full. You will also be responsible for any fees that the car will make when it goes to auction.
It’s the worst case scenario, so make sure to be clear with your finance company when enacting your voluntary termination.
Voluntary termination and your credit score
It's like that a voluntary termination will appear on your credit file. However, unlike a voluntary surrender (which will appear there as a solid negative), a voluntary termination shouldn't have an adverse impact on your ability to get credit in the future. This is because in choosing to voluntarily terminate your agreement (provided you've paid the 50% minimum), you are acting within your rights according to the Consumer Credit Act. You're only allowed to exercise your right to voluntary termination if you have adhered to the conditions of the contract.
What you may find is that a voluntary termination on your credit file makes future car finance providers more hesitant to lend to you in the future, which may mean that you're asked to pay a higher deposit.