Can I end my HP agreement early?
When it comes to car finance, Hire Purchase – HP for short – is one of the most popular ways to spread the cost of buying a car over time.
This type of loan lets you split the car’s purchase price into fixed monthly repayments (including interest) and, when you reach the end of the loan term, it’ll be all yours!
But can you wait that long? With HP loan terms lasting anywhere from one to six years, there are a whole host of reasons why you might need to bring your agreement to an end early. Your finances might have changed, you might need to swap your supermini for a seven-seater, or you simply might have fallen head over heels for a new model that you can’t stop thinking about.
The good news is that you have options. While HP agreements are legally binding and can’t necessarily be terminated overnight, there are steps you can take to end your term early.
Read on to learn more about ending an HP agreement early and what you should consider before making your move.
How does HP car finance work?
HP car finance can be broken down into three stages:
The deposit
You can put some cash down upfront to reduce the amount you need to borrow, but no deposit car finance deals are available.
The loan term
You’ll then pay the remaining balance in fixed monthly repayments including interest. HP loan terms typically last between one and six years.
The end of the agreement
Once you get to the end of the loan term, you’ll need to make a final payment known as the Option to Purchase fee to cover the admin costs and then the car will be all yours!
Keep in mind that you won’t be the car’s legal owner during the HP agreement, so you can’t sell or modify it (no shiny spoilers or turbo sound systems), however you will be responsible for all its running costs and general maintenance.
How can I get out of my HP finance agreement?
Whether your circumstances have changed or you’re simply ready to switch things up and get a new car, you do have options to get out of an HP finance agreement early.
It’s not quite as easy as simply walking away – an HP deal is a legally binding agreement, after all – but that doesn’t mean you have to wait until the term comes to an end naturally.
There are three main ways to end a HP finance agreement early:
Cooling-off period
If you’ve just signed your HP contract but worry that you’ve made a mistake, you can terminate the agreement without penalty within the first 14 days. This is known as the cooling-off period and it’s your legal right under the Consumer Credit Act 1974. If you do choose this option but still want to keep the car (or you’re legally committed to buying it), you’ll need to find another type of finance.
Settle the finance
You can request a settlement figure from your lender at any point throughout your agreement. This is the amount you’ll need to pay to end your agreement and become the car’s legal owner. It will usually be made up of the remaining loan balance, minus any future interest; however you’ll need to take into account any admin and early termination charges that might apply.
Voluntary termination
Voluntary termination is a legal right, set out under Section 99 of the Consumer Credit Act 1974, that allows you to end your loan and hand the car back to your lender at any point. You just need to tell the lender you want to voluntarily terminate and return the car.
It’s important to note that you will need to pay 50% of the total amount payable. If you’ve already paid this, you can return the car without needing to pay any more money although extra charges might apply if the car is damaged beyond fair wear and tear.
Can I cancel my HP agreement with more than half of the balance outstanding?
You can cancel your agreement by exercising your right to voluntary termination at any time throughout the loan term. With an HP deal, you’ll likely hit the 50% threshold when you’re roughly halfway through the loan. If you’ve made some payments towards the balance but still have more than 50% of the total amount payable remaining, you will need to pay the difference.
Are there any early repayment fees?
When you choose to settle your finance, an early repayment fee will likely apply. The details of this should be included in your agreement and you’ll be able to see how much you might need to pay before you sign on the dotted line.
When weighing up your early termination options, it could be worth calculating whether the money you’ll save on interest by settling your finance early is higher than the extra charges you’ll need to pay (time to dust off those maths skills).
Can voluntary termination impact my credit score?
Once your voluntary termination has been accepted and you’ve given the car back to the lender, it will be listed on your credit report.
However, it shouldn’t affect your score, especially if you haven’t missed any payments. A mutual end to an agreement with no defaults is usually viewed much more positively by credit agencies and future lenders than missed payments.
You might want to think more carefully if you’ve exercised your right to voluntary termination more than once. As each instance will be listed on your credit report and ending a car finance agreement early can cost the lender money, they might be more reluctant to lend to you in the future if they think you’re likely to opt for voluntary termination again.
How can I settle my HP finance early?
First, you’ll need to get your settlement figure from your lender.
This is the amount you’ll need to pay to bring your HP finance to an end early and become the car’s legal owner. It’ll usually be made up of any remaining loan payments, but you won’t have to pay any future interest. On the other hand, an early repayment charge will likely apply, and you might need to cover additional admin fees too.
You can contact your lender at any time to request your settlement figure. Once you have it, the figure will be valid for at least 14 days. You can then pay the balance from your savings or refinance with a new loan.
What other options are available?
If you need to get out of your HP agreement but can’t afford to settle the finance or pay the difference to cover 50% of the total amount payable, there are two other options available:
Voluntary surrender
If you’re struggling with your finances and can’t find a way to pay the difference and reach the 50% threshold required for voluntary termination, there is another option. Voluntary surrender is typically considered a last resort as it will negatively affect your credit score.
With voluntary surrender, the lender will take back the car and offer it for sale at auction. What happens next will depend on the sale price it achieves: if it’s higher than the outstanding loan balance, you can walk away. On the other hand, if the final sale amount isn’t high enough to clear your outstanding finance, you’ll still be responsible for making up the difference and will likely need to arrange a payment plan to do this in instalments.
Refinance
If you’d like to keep the car but need a finance agreement that better suits your circumstances, refinancing could be a good option. This is when you end your HP deal early and replace it with a new one, usually with a different lender.
If your credit score has improved over time (firstly congratulations!), you could find a deal with a lower rate of interest. You might also be able to swap to an agreement with a longer loan term and lower monthly repayments. Keep in mind that if you do switch to a longer loan term, you’ll likely pay back more in interest overall.
FAQs about cancelling a hire purchase agreement:
Am I in positive or negative equity?
On the other hand, if your car is worth less than the settlement figure you could be in negative equity. All cars depreciate (lose value) at different rates, so your car could be one of the unlucky ones. In that case, you’ll need to make up the difference from your own pocket before you can settle the finance or offer the car for part-exchange.
What condition does the car need to be in when I return it?
When you hand the car back to the lender, they expect it to be in good condition. That doesn’t mean it needs to look brand-new (a few scrapes and scratches are just part and parcel of car ownership), but any damage beyond fair wear and tear will likely lead to extra charges.
If you’ve dented the bumper, broken the air conditioning, or ended up with a major scratch from colliding with a post in the car park (we know, it came out of nowhere), then it might be worth paying to get the car repaired before handing it back to the lender than facing penalty charges.
Should I pay off my finance or refinance?
When weighing up your options, there’s no right or wrong answer; the best choice for you will be based on your individual circumstances and priorities.
If you have savings available to settle your finance, you could become the car’s legal owner almost straight away. That means you don’t have to worry about making any more monthly finance repayments and you’re free to do whatever you like with the car: keep it, sell it, or part-exchange it for a newer model.
On the other hand, finding the funds to clear your settlement figure in one go isn’t always easy. That’s where refinance comes in. This is when you take out a new deal with new terms and usually a new lender to pay off the remaining finance. This could be a good option if your credit score has improved, and you might qualify for a lower APR.
However, keep in mind that there’s no guarantee you’ll be able to get a loan with a lower rate and you won’t be the car’s legal owner until the loan term ends (unless you’ve refinanced with a personal loan).
How long does it take to settle a car on finance?
Step one is asking your lender for your settlement figure. Once you’ve received this, it should be valid for at least 14 days, although the amount might change if you make another repayment in this time.
Once you have this figure, you can pay the balance, transfer the paperwork, and then congratulations – your pride and joy is now legally all yours!
Is it cheaper to settle car finance early?
If you’re thinking of settling your finance early so you can save money on interest, it might be worth doing the sums first. That’s not to say you won’t save money, when you settle finance five years into a six-year loan term, for example, you’ll skip a year of extra interest.
But other charges will apply. Most settlements will include an early termination fee and there could be additional admin fees and penalties to pay for any damage on the car. Double-check that these fees won’t cancel out the savings you’ll make on interest before pulling the trigger.
