Drivers with financed cars sometimes encounter financial difficulties that make it hard for them to make payments for their car finance instalments on time. There are also others who realise they don’t need the car anymore and are wondering if they can end their car finance agreement ahead of time. If you’re in a situation like this, you may consider handing back the car to the lender through a process called "voluntary termination".
What is Voluntary Termination?
When you buy a car through a Hire Purchase deal or a PCP agreement, you’ve signed a contract whereby you agreed to make all the monthly payments throughout the term of the agreement. Before making a major decision like this, it’s important to crunch the numbers and ensure that you can afford the payments and other car-related costs.
However, life can be unpredictable and if there are sudden and unforeseen changes to your financial situation, voluntary termination can be a way to help you get out of your car finance contract. Voluntary termination is available as an option to help prevent your financial difficulties from getting worse. But how does it work? Read on to know the process of voluntary termination for Personal Contract Purchase and Hire Purchase agreements.
What’s the Process for Voluntary Termination?
Whether you have a used car or a brand new car that you bought through HP or PCP car finance, you can voluntarily terminate the agreement if the situation calls for it. For this to happen, you need to have paid at least 50% of the total amount payable on your car finance, after which, you may hand back the car to the car finance company. Note that the total amount payable doesn’t only include the loaned amount but also the fees and interest for financing the car.
Your first step will be to contact your lender to discuss your options, depending on your circumstances. Some websites will include a car finance voluntary termination calculator, so it's worth a look to see as this can be very helpful.
How to End a PCP or HP Agreement Early?
In a Personal Contract Purchase deal, there’s a substantial optional final payment called a balloon payment. In most cases, the amount can be more than 50% of the car’s value. If you have a PCP agreement, you’ll get to this point of having the option to purchase the car when you’re at the near end of your contract. However, if you have a shorter term contract, most of the car’s value will most likely be retained, making the balloon payment even larger.
Reaching the Halfway Point
So, how does voluntary termination of car finance PCP work? For a PCP agreement, you would still need to reach 50% of the car’s price to end the contract early. If you haven’t reached that midway point yet, you may pay a lump sum if you have enough cash for the payment.
With an HP agreement, the monthly repayment amount is higher than PCP because it doesn’t require you to pay a balloon payment at the end of your contract. In this case, you’ll be able to reach the 50% point much faster. Your deposit and monthly repayments cover the car’s whole value, unlike with PCP where your payments go toward the predicted depreciation of the vehicle.
Handing Back the Car
Say you’ve reached the halfway point in your car finance repayments and you want to return the car to the lender, will there be other charges? With voluntary termination, you don’t have to pay other charges for any damage to the car. As long as you’ve already paid at least 50% of the total amount you owe, you can simply hand back the car and walk away without paying anything else.
What if you exceeded the mileage limit? In voluntary termination, the car finance company cannot enforce this charge. However, some lenders might insist or demand payment for it so they can recoup lost income because the contract was cut short. Also, they might say that you have broken the terms and conditions of the car finance agreement you signed by exceeding the pre-agreed mileage limit.
Expect Some Delays in the Process
As a borrower who financed a car through a PCP or HP deal, you have a legal right to end your contract early when you know that you can no longer afford to make payments. However, just be ready for some delays in the process if the lender is trying to prevent you from ending your contract ahead of time.
It’s understandable for lenders to try to avoid a voluntary termination of a car finance agreement because they’re going to lose money. Remember, your payment of at least 50% is not sufficient to cover the value that the car has lost. If the lender can delay the process for voluntary termination, the longer it is that they can keep you paying.
Key Points to Remember
You may not use voluntary termination if you’re already behind in your monthly payments. That’s why as soon as you know that you can no longer afford to make the payments, you should start the voluntary termination process as soon as possible. Don’t wait for that point where you’re already missing payments. Also, take into account the possible delays on the part of the lender.
What if you’ve already missed payments? In this case, you would have to return the car to the car finance company but you would still need to pay the remaining amount. This is not a good scenario if you’re already facing financial difficulties. The sooner you start the process, the better it would be for you.
You might be wondering " does voluntary termination in car finance affect my credit rating?". A voluntary termination will probably appear on your credit history, but so long as you have paid the required 50% plus any other fees for undue wear and tear etc, then it's effect on your credit score will be minimal.
Problems with finances can happen to anyone at any time so it’s important to be prepared and know your alternative plans. If you’re ever in a challenging situation financially, it’s best to get in touch with the car finance company as soon as possible and explain to them your situation.
Be honest about your circumstances because they will try to help you as much as they can. They might let you keep the car and make a new payment arrangement that would work better for you. Think about this thoroughly and assess if you will be able to manage this financial commitment.
If your car finance is with Carmoola, then please do get in touch with us - there is no call centre to navigate and our friendly staff will help to guide you through the best options for you.