Voluntary Termination Explained
Ending your car finance agreement early - reasons for finishing your contract, your rights, how to do it, potential issues, how it affects your credit score and important things you need to know.
Sometimes, certain situations can occur in life that have a knock-on effect on our finances, so it’s understandable if you’re looking to cancel certain contracts that you can no longer afford, particularly expensive car finance payments.
So what are your options and how do you get rid of a car you can’t afford?
In this complete guide, we explain the meaning of voluntary termination (VT) and whether or not you’re eligible to cancel your personal contract purchase (PCP) or hire purchase (HP) car finance contract early or not.
Voluntary termination on car finance: What is it?
To define voluntary termination, it simply means that a consumer wishes to end their car finance agreement and give their vehicle back early.
Many UK drivers who take out a personal contract purchase (PCP) or hire purchase (HP) agreement on a new vehicle are often unsure if they can voluntarily cancel their contract for a particular reason at any time, but it is important to know that as per the Consumer Credit Act 1974, you have the legal right to cancel your car finance - provided that you meet certain terms which we will outline below.
As this is a legal statutory right, a voluntary termination clause must be included in the terms and conditions of a car finance deal, even though the car finance company won’t encourage you to do this.
Why would drivers voluntarily end their car finance?
Depending on your situation, there are a number of reasons as to why you may want to cancel your PCP or HP car finance contract.
The main reasons for wanting to apply for a PCP or hire purchase voluntary termination are:
- Your financial situation has changed and you cannot afford to continue with the monthly repayments
- You want a new car and don’t want to wait until your current contract ends
- You no longer need the vehicle
If you have simply changed your mind about your vehicle and would like to get a new one, you may want to pay the remaining amount owing on your car finance contract if you have equity, so that you can take ownership of it and can therefore take it back to exchange it for another vehicle.
But before you consider that, let’s take a look at how a voluntary termination works.
Read more: A Complete Guide to Car Finance
The process of voluntary termination - How does it work?
If, for whatever reason, you want to end your car finance contract early, whether that’s a PCP or HP agreement, you will need to have paid 50% of the total amount you owe the car finance company as stated in your contract (including interest). This is usually done at the half-way point of a car finance agreement.
As long as you have paid 50% of the total amount owed (also known as total amount payable), and provided that there is no damage beyond the company’s fair wear and tear terms, you will qualify for a voluntary termination and won’t be charged extra fees for doing so.
If, when cancelling, you haven’t paid 50% of the total amount, you will need to arrange with the company how you intend to pay it back after cancelling the contract. Once you’ve paid the 50%, you won't have to pay anymore.
The only situations in which you will be refused voluntary termination or faced with additional charges is if your car exceeds the fair wear and tear status and exceeds the mileage limit you initially set when taking out the contract, so expect to pay fees if you’re returning a car that’s excessively damaged and/or has covered more mileage than that stated in your agreement.
If you have missed your PCP or HP payments with them in the past and therefore have late payment fees owing, you will need to make sure this is paid too, on top of the 50%.
How to start a voluntary termination
To voluntarily end your PCP or HP car finance contract, you will need to get in touch with your car finance company in writing, via email or letter (which must be signed), to inform them that you wish to carry out a voluntary termination and hand the car back.
It is important that you do this clearly in writing to avoid the company assuming, or deliberately misunderstanding, that you want to voluntarily surrender, which is completely different to voluntarily terminating your contract and something that you should try to avoid.
What is voluntary surrender?
If you voluntarily surrender your PCP or HP car finance contract, this means that the car finance company will take the car back off you, then sell it at an auction.
You will then be asked to pay the difference between the amount the car was sold for and the amount remaining on the car finance loan (total amount payable). You may even have to pay fees on top of this to cover the cost of repossession, auction fees, penalties, etc.
For this reason, it is highly important you make it clear that you need to voluntarily terminate your contract, so that you avoid having to pay off the total loan amount.
Potential issues with voluntary termination
If you’re considering finishing your contract early, there are some potential issues that could arise during the process, so it’s better to be aware of them before you do so.
- If you have previously missed repayments on your car finance or paid them late, the car finance company can refuse your request to voluntarily cancel your contract.
- Many car finance companies want to prevent customers from voluntarily terminating their agreement, for obvious reasons, so they might not be helpful if you request to do so. In many cases, they attempt to draw it out or make it seem complicated so that you’ll stop trying to end it early, but you have the legal right to do so.
- The car finance company may try to accuse you of damaging the vehicle beyond fair wear and tear and try to charge you for excess damage, as well as excess mileage. To cover your back, take pictures of the car’s condition (with dates) throughout the contract and towards the end, so that you have proof if you need to dispute anything.
- If you are leasing your car, you will probably find that there isn’t a voluntary termination clause in the agreement, so cancelling a lease may end up costing you more. Just be sure you understand the terms of your agreement first before asking to terminate your contract.
- When your voluntary termination starts, you are not obligated to sign any documents, but some companies may send you some claiming that you must. Make sure you read this carefully, because they may be trying to get you to sign to something that you don’t want to do.
Does voluntary termination affect your credit rating and score?
All of your finance history is recorded on your credit report, so your voluntary termination of your personal contract purchase (PCP) or hire purchase (HP) car finance contract may show up.
Having said this, a voluntary termination will not impact your credit score (or rating), as you are acting as per your statutory consumer rights. In addition, it will not affect any future finance applications you make.
If you’ve been financially impacted due to a sudden life event, such as the Coronavirus pandemic or loss of job, it is crucial that you do not just stop making your repayments as these will show up as missed payments on your credit report and will therefore have a negative impact on your score.
If your credit score goes down as a result of a drastic financial decision such as this, it will have a knock-on effect on your ability to borrow money in the future, or you may be able to apply for credit but with higher interest rates, so it’s important that you try to protect your score as much as possible.
Rather than missing payments, a voluntary termination is a much better way of ending your contract early. Alternatively, you should get in touch with your finance company to see what help they can offer you if you’re struggling financially, particularly as a result of the Covid-19 crisis, as many companies have been offering payment holidays to customers who’ve been affected.
Bear in mind that these payment holidays may also have a detrimental impact on your future credit applications, despite not showing on your credit report, as lenders may take it into account when assessing your creditworthiness through methods outside of your actual credit report (such as Open Banking).
Applying for finance - things you must know first
If you want to buy something on finance, be it a car or mobile phone, it pays to do your research beforehand so that you can find the best deal and understand what your finance agreement entails.
Whatever finance agreement you sign up to, it’s really important to read the terms and conditions, especially for clauses that refer to ending the contract early. This way, you’ll know where you stand if you ever need to terminate your contract and you’ll be aware of any fees for cancelling from the start. In most cases, however, they will expect you to pay at least 50% of the total amount.
It is also a good idea to keep on top of your credit score, which you can do so by checking it regularly and keeping on top of payments. This wayBy doing this, you’re not left in the dark about your future borrowing eligibility and can keep track of your finances.
To check your credit score, read our Checkmyfile review to see how you can get a more detailed report of your credit rating for free - you can see data held on you from all the main UK credit reference agencies: Equifax, Experian, TransUnion and Crediva.
Alternatively, for more information regarding car finance and credit scores, read our related guides below.