When finance agreements can last four, five, or even six years, our individual circumstances can change a lot over the course of a loan term.
A car and finance agreement that were ideal for your budget and lifestyle when you first signed on the dotted line might not be such a great fit a few years later.
Don’t panic; if your situation changes, you don’t have to be stuck with a car finance agreement that you can no longer afford or a car that doesn’t meet your needs.
That’s where voluntary termination comes in.
Got a specific question? Why not jump to:
- What is car finance voluntary termination?
- Why might I voluntarily terminate my agreement?
- How does voluntary termination work?
- What’s the difference between voluntary termination and voluntary surrender?
- What are the risks of voluntary termination?
- Will voluntary termination affect my credit score?
What is car finance voluntary termination?
When it comes to car finance, voluntary termination is one of our statutory rights.
Under Section 99 of the Consumer Credit Act, you have the legal right to cancel or end your car finance agreement before its official end date if certain conditions are met.
The most significant condition is that you must have paid – or be prepared to pay - at least 50% of the total amount payable on your loan to exercise your right to voluntary termination.
Why might I voluntarily terminate my agreement?
There are a whole host of reasons why you might choose to voluntarily terminate your finance agreement, but the two most common are due to a change in circumstances or a change to your affordability.
Life happens; you might have lost your job unexpectedly, been severely impacted by the UK cost-of-living crisis or moved to the heart of a city where using public transport is more practical than driving. A loan agreement that you signed two, three, or even four years ago may no longer suit your circumstances and, if you still have several months or years to go until the term ends, it’s understandable that you might not want to wait it out.
Whatever the reason, voluntary termination can free you from the burden of monthly car repayments that you don’t want or can’t afford to keep paying.
If you’ve found that you’re struggling to make your loan repayments and are worried that you might start missing them, voluntary termination could let you hand the car back and walk away before you default on the loan. This could help you avoid the hit to your credit score and the stress and worry that can come from falling behind with your bills.
How does voluntary termination work?
So, you’ve decided voluntary termination is the right way forward for you; what next?
The first step is to notify your lender in writing. This can be via email or letter. Different lenders may follow different processes (accepting notice over the phone instead, for example) so it’s worth double-checking your agreement for more details on how their voluntary termination process works.
Once you’ve told the lender you want to exercise your right to terminate your finance early, you will need to pay 50% of the total amount repayable. If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money. It’s important to know that this doesn’t just mean 50% of your outstanding loan balance, but any additional fees or charges too.
Assuming you meet the criteria, the lender will arrange to either collect the car or have it returned to them. They’ll then usually carry out checks to make sure it’s in good condition and in line with its age and usage.
Unfortunately, good condition – often known as fair wear and tear – is subjective. Consider taking photos of the car before returning it for your own records but be prepared to face extra charges for any damage that exceeds a small scuff or scratch.
Voluntary termination of Hire Purchase (HP) finance
Hire Purchase (HP) finance is one of the most popular ways to fund buying a car. Loan terms can last between one and six years and, when you reach the end of the agreement, you’ll become the car’s legal owner. You’re then free to keep it, sell it or part-exchange it – the choice is yours!
If you’re unable to continue making your repayments, voluntary termination might be right for you. You just need to tell the lender you want to voluntarily terminate and return the car. If you exercise your right to terminate, you will need to pay 50% of the total amount payable. If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money.
Depending on the terms and conditions of your agreement, this might coincide with the halfway point of your loan term. However, extra fees and charges can mean it takes longer to hit the 50% threshold. You can also choose to make up the difference from your savings if you haven’t yet paid the required amount.
Voluntary termination of Personal Contract Purchase (PCP) finance
Personal Contract Purchase (PCP) finance works a lot like HP, but it gives you more options at the end of the agreement. You can choose to buy the car by paying the one-off balloon payment, hand it back and walk away, or use any available positive equity as a deposit in a new agreement.
If your circumstances have changed and you need to terminate your agreement before its official end date, you can opt to voluntarily terminate. This works the same as with HP, you just need to tell the lender you want to voluntarily terminate and return the car. Remember, you will need to pay 50% of the total amount payable (which includes the balloon payment). If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more.
You’ll likely naturally meet the 50% threshold at a later point than you would with HP as your monthly repayments will probably be lower and the total amount payable also includes the balloon payment. In this case, you could choose to pay the difference.
However, if you can’t afford to pay the outstanding amount and only have a few months left on your PCP agreement, it might be better for your finances if you keep up with your monthly repayments until the original end date and simply hand the car back once the term ends.
What’s the difference between voluntary termination and voluntary surrender?
Voluntary termination and voluntary surrender might sound very similar, but there are some key differences.
Voluntary surrender is available to people who can’t afford to pay the difference up to the 50% point, which needs to be paid once you voluntarily terminate. It’s a last resort solution, usually reserved for people who are experiencing severe financial difficulties and can’t continue making their repayments.
The lender will typically take your vehicle back and then sell it at auction. If it sells for more than your outstanding finance, you can simply walk away, although your credit score will likely be negatively affected. If it sells for less than the amount still owed, you’ll still be liable to plug that gap and may need to agree to a new repayment schedule until it’s cleared.
Due to the effect of voluntary surrender on your credit score and the fact that you’re still liable to pay the remaining finance (if it’s not cleared at auction), it’s important that there’s no confusion between voluntary termination and voluntary surrender.
When writing to exercise your right to voluntary termination, make it crystal clear that you want to terminate, not surrender, your finance to avoid any issues.
What are the risks of voluntary termination?
Voluntary termination can be viewed as a last resort by some as it does have downsides. However, the risks associated with voluntary termination are likely to be less severe than what could happen if you default on the loan and end up having your car repossessed.
You may be at more risk of experiencing the downsides of terminating early if you’ve already paid off a substantial amount of your total loan or your car is damaged:
Charges for damage
When you return your car after ending the finance agreement early, the lender will check its condition. They will usually accept fair wear and tear (proportionate to the car’s age and past use) but will charge you extra for any repairs that go beyond things like small scratches to the bodywork and scuffs on the upholstery.
Charges for extra mileage
If you’ve opted for voluntary termination of a PCP finance agreement, you’ll likely have had an annual mileage restriction written into your contract. If you’ve gone over this limit and there are more miles on the clock than the lender expects, they can charge you for each mile you went over the limit.
Positive equity
If you’ve already paid 60 or 70% of the total amount payable on an HP finance loan and your car is one that is known to hold its value well, you might find yourself in positive equity. This means that your car is worth more than the remaining finance. In this case, you might be better off (if you can afford it) settling the finance instead to become the car’s legal owner and then sell it.
Will voluntary termination affect my credit score?
Once your voluntary termination has been accepted and you’ve given the car back to the lender, it will show up on your credit report.
The good news is that 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 lenders than unpaid bills.
The only note of caution is if you have chosen 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 terminate.
