Voluntary termination of a car finance agreement is the legal right of a borrower to end the contract early. It essentially gives you the ability to return the car and walk away in certain circumstances.
For example, if you lose your job, face huge unexpected expenses, or have another life-changing situation, you can break free from your agreement and avoid penalties. While it’s not ideal for car finance companies, it protects the consumer.
If it sounds too good to be true, that’s because acting on your voluntary termination right can be tricky. This guide will explain how it works when you’re entitled to apply, and what you need to know to ensure everything goes smoothly.
Voluntary termination or voluntary surrender
Voluntary termination is not the same as voluntary surrender. The car finance company may accidentally or deliberately misinterpret your voluntary termination as surrender. It’s important for you to know the difference between these terms to ensure your application is processed correctly. Otherwise, you might end up facing thousands of pounds worth of extra charges.
Voluntary surrender implies that you return the car while still owing the rest of the borrowed amount. This is one of the worst scenarios you can find yourself in after financing a car. If your finance company sells your car at an auction, the collector will come after whatever you still owe. This is because the resale value doesn’t always make up for the remaining balance of the loan.
Under voluntary termination, you are liable for 50% of the Total Amount Payable plus any outstanding arrears. After you terminate the agreement, you owe nothing.
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Voluntary termination is your legal right
You have the right to terminate Hire Purchase and Personal Contract Purchase agreements based on Consumer Credit Act 1974, Section 99. The law is applied to other goods, not exclusively vehicles. So, if you want to know how this section relates to your financing option, your contract documentation should detail your rights.
The UK Government created the CCA to regulate the consumer credit industry. This framework protects private consumers and requires lenders to be transparent about all options available to the consumer.
The finance company may try to influence your decision, which is why you should be aware of what you’re entitled to.
Exploiting the safety net
There have been cases when borrowers tried to exploit the clause without having the grounds to do so. Voluntary termination usually loses the finance company money. This is because that 50% doesn’t always cover your car’s depreciation. So, the lender will have to take back the car even if it dramatically depreciated beyond their expectation.
Voluntary termination can be very confusing to an average person, which is beneficial for lenders. They always want to make sure you’re not just taking advantage of a situation where early cancellation is more favourable than seeing out the agreement.
But if you do everything properly, they have no other option but to approve the voluntary termination of car finance. Locate the get-out clause before entering any agreement and point it out when you need to. Bear in mind that you risk being denied another finance agreement from the same lender.
Reasons for voluntary termination
The three most common reasons to engage in VT are a change in circumstances, no need for the car, and a new finance deal.
- Your personal or financial circumstances have suddenly changed – You can’t afford to keep up with repayments because you’ve been laid off, you/your family members are going through health issues, or there are bigger financial commitments.
- You no longer need this exact car – Perhaps you received a new car as a gift, moved to a different area, or simply decided to stop using private transport. Or you could’ve realised that you never needed this car, and it didn’t provide any value to you.
- You want to enter a new finance deal for a new car – Maybe you aren’t satisfied with the finance option you chose, found something else offered on better terms, or have your eyes on a newer model.
In reality, you don’t have to explain your reasons to the lender. You can if you want the lender to be more understanding. But every situation is different; if your justification is not on this list, early termination is still possible.
How voluntary termination works
VT applies to new and used cars that have been financed using personal contract purchase (PCP) or hire purchase (HP). But there are two main conditions:
- There is no excessive damage (no more than normal wear and tear);
- You agree to repay 50% of the Total Amount Payable, the cost of the vehicle when you bought it, plus interest/that came with the agreement).
If both conditions are met, you can hand over the car and cease your car finance without further charge.
How does it work for PCP?
So, you’ve already paid half of the total finance amount under your PCP agreement. This includes interest and other charges stated in the contract.
But PCP finance comes with a special requirement – the balloon payment. This means that even if you made it past the halfway point in your monthly payment schedule, it wouldn’t be considered as 50%. You still have your final payment waiting for you at the end, half of which must also be paid.
If you haven’t made that 50% mark yet, you can still cancel your agreement; you’ll just have to pay the difference during voluntary termination.
- Your total car finance amount is £12,000.
- With interest, your total repayment amount would be £14,000.
- Under the PCP agreement, you’re making monthly repayments of £185 over the period of 48 months, and your lump-sum payment is set at £5,300.
- At the halfway point, you will have paid back £4,440.
- This means you’ll have £2,560 to pay to reach your minimum requirement of 50% repayments.
If you have already surpassed the halfway mark and paid more, you can voluntarily terminate the contract, but you won’t receive any refund.
How does it work for HP?
Voluntary termination of HP is even easier than PCP. Under an HP finance agreement, you don’t have the lump-sum requirement – your payments are evenly distributed across your monthly schedule.
If you’ve reached the halfway point in your schedule, you automatically meet the 50% requirement. If you haven’t, you just pay the difference and terminate.
What sort of damages are covered and not covered?
The law is vague about what is considered reasonable damage. The same goes for ‘normal wear and tear’ or ‘reasonable care of the goods’. Without the proper definition or legal guidance, damages are subject to negotiation and dispute from the car finance company.
We can determine what is ‘acceptable’ from other VT cases. Lenders usually don’t mind:
- Surface chips on the windscreen and windows – But you can’t return the car with any spreading cracks in the glass;
- Minor chip repairs – They have to be done through authorised centres or at a high quality standard;
- Scratches – As long as they can be polished;
- Small areas of chipped paintwork – Only on the topcoat. The base coat can’t be damaged;
- Rusted or corroded wheel trims (not excessive);
- Slight scratches on the headlights;
- Scratches on less than 50% of the rim;
- Slight marks on carpets, upholstery, trim, and seat covers.
‘Unacceptable’ wear and tear usually means:
- Dents and scratches with rust or damage to the base coat of the paint;
- Big cracks;
- Faulty wiper blades;
- Missing or badly scuffed interior parts;
- Bad smells (smoke, pet animal odours, etc.);
- Warning lights, mechanical faults;
- Broken brake discs;
- Incomplete service history.
There are numerous things that can go wrong. Before the finance company has the chance to inspect the car, you’ll have to rely on your own judgment about the car’s condition.
How do I start a voluntary termination?
Voluntary termination of car finance is typically used past the halfway point of your agreement (although it can technically be enacted at any time). To start the process, all you need to do is inform the finance company that you wish to use VT.
Here are all the steps from start to finish:
- Tell the finance company that you are terminating your contract in writing via email or through a signed letter. It’s even better to send both. Send the letter by recorded delivery to the address set out in your credit agreement, keeping the proof of postage.
- Use phrases like ‘terminate my agreement’ or ‘voluntary termination’. Do not sign any new contract or agree to surrender or repossess your car.
- Deliver the car to the dealership for inspection. Alternatively, they will pick it up themselves.
- Hand over the servicing history and keys and take photographs as proof that you returned it in reasonable condition.
- The lender will confirm that you don’t owe any money, and you’ll be freed from your debt.
How long does voluntary termination take?
It depends on two things: how quickly the provider processes your request and whether you meet the requirements. Some finance companies make things more complicated than they need to be, which slows down the whole process.
As for the circumstances surrounding your voluntary termination, that is up to you. Make sure you meet the aforementioned criteria – 50% of the Total Amount Payable should be paid off, and if there is damage, it should be fixed. But there is no way to tell exactly how many days/weeks it will take – each case is different.
Does voluntary termination affect my credit score?
There is probably a reason why you’re terminating your agreement and returning the car. Make sure this reason doesn’t have a sizable impact on your ability to make your 50% repayment. If you fail to do so, it won’t be VT hurting your ability to get more loans in the future – it will be missed payments and debt.
Voluntary termination will appear on your credit report. But assuming you make the required payments in time, including any additional charges, you shouldn’t feel a significant effect.
Going further, your credit score, creditworthiness, or chances of being accepted for car finance should be relatively the same. One possible negative consequence is increased APR (interest) charges from lenders.
How long does a voluntary surrender stay on your credit?
Voluntary surrender, or repossession, will stay on your credit file for seven years from the original missed payment, which subsequently leads to the derogatory status. This is also called the original delinquency date.
Such loan defaults leave a negative mark on your credit score. This might be especially detrimental to your acceptance rate for automotive-specific loans. At the very least, you’ll be charged higher interest due to being a high-risk borrower.
Take active measures to rebuild your credit. Even if you don’t manage to resolve the account completely, future lenders will want to see that, despite slip-ups on your part or disasters you had nothing to do with, you can get back on track.
What if something goes wrong?
Unfortunately, the voluntary termination process might not go as planned. Below are a few common issues and what you can do about them.
The car finance company can hit you. This is simply what you have to accept.
If you’re not sure about the amount, everything should be stated in your contract – this is another reason to read what you sign very carefully. Look specifically for collection charges, which is the compensation you pay to the company for picking up your car.
The mileage limit is also stated in the original agreement. The finance company will check the total mileage on the clock when you return the car.
The obvious advice would be to stay within the limit to avoid the excess mileage charge. But if you happen to go over, you’ll have to pay a of up to 30p per extra mile. The is set by the lending company and depends on the model of your car.
Any damages to the vehicle beyond standard expectations will be charged on top of other payments. One way to prevent it is to fix the damage before returning. However, any repairs must be done through authorised shops and disclosed to the finance company.
Voluntary termination is not intended to exploit loopholes in UK law. It gives consumers who are unable (or perhaps unwilling) to pay off their car the right to quit. Before terminating, make sure you’re not violating the terms of the contract.
Treat voluntary termination as a last resort. If your circumstances suddenly change, reach out to the lending provider. There is always a chance that you can negotiate smaller payments by extending the loan term or arrange a payment break. Our best recommendation is to try to repay all your debts.
|Total charge of credit||£3,731.35|
|Total amount payable||£15,731.35|