When you enter into a car finance agreement, it can feel very final and like there is no way out. We all know that signing up to a car finance agreement is a big decision that should be properly considered, but many of us don’t know how to cancel a finance plan early.
Under UK law, everyone has the right to cancel certain car finance plans early but understanding these rights can be difficult. With various stipulations, finance types and requirements involved, it is easy to get confused about whether you can cancel your finance plan early. In this guide, we are sharing our expert tips, advice and knowledge on how to successfully terminate a finance agreement early.
What Is Voluntary Termination?
Voluntary termination is the legal right for a borrower to cancel a car finance plan earlier than agreed. It is used for both Personal Contract Purchase (PCP) and Hire Purchase (HP) finance agreements and gives you the chance to end the plan and walk away.
It is common for financial and personal situations to change during the course of a car finance agreement, and it could leave you unable to make the monthly repayments. When this happens, you could be eligible for voluntary termination of the finance plan. This means you could make no further payments and walk away from the agreement with no additional charges or penalty fees.
When you are thinking of taking out a car finance plan, you should always consider how you would keep up the repayments should your financial situation change. Voluntary termination is not a guarantee on all finance agreements and shouldn’t be depended on.
What Are My Legal Rights To Voluntary Termination?
The law in the UK gives all borrowers the right to voluntarily terminate a PCP or HP car finance plan early. The circumstances where this comes into play are set out in Section 99 of the Consumer Credit Act 1974, and it covers both new and used vehicles purchased on finance. The law has been designed to help protect people who have taken out car finance but reached a point where they can no longer afford the repayments.
At the same time, the law also protects the finance providers and ensures that you can’t just walk away from your financial obligations at any time with no penalties. There is a minimum repayment amount in place, which is 50% of the total amount payable on the finance plan. While this law does cover both HP and PCP agreements, they both work in slightly different ways.
It is important to be aware of which type of car finance you have, as this does impact your ability to end the agreement early. If you are not sure if you have HP, PCP or a different form of finance, you can check this on your agreement documents.
How To Cancel PCP Finance Early?
PCP finance, or Personal Contract Purchase, is one of the most common types of car finance available today. It requires you to pay an initial deposit as a lump sum, and then a series of monthly repayments for the remainder of the term.
At the end of the finance agreement, you have the choice of either making a balloon payment and keeping the car or giving the car back and ending the plan.
A PCP agreement can be ended early using voluntary termination, as long as you have paid off at least 50% of the total agreement amount. This total agreement amount will include all interest and fees that you are also required to pay. This also consists of the balloon payment that is due at the end of the finance term. Because of this balloon payment, it is unlikely that you will have paid off 50% of the agreement by midway through the repayment term.
This means you cannot end the agreement halfway through the finance term, as you also need to take the balloon payment into account. As well as having paid half the total of the finance plan, the car must also be in a reasonable condition to return in order to end the agreement early.
If you have not yet repaid half of the agreement amount, then you are still able to end the agreement early. You will be required to pay off the difference so that 50% of the total has been paid. If you have paid more than 50% of the total, then you are free to end the agreement whenever you please, but you will not be entitled to any refund.
Finance companies will accept general wear and tear of the vehicle as being a reasonable condition, but any major damage will not be accepted. If your vehicle has damage beyond moderate wear and tear, you will need to get it fixed first or pay an additional charge to the finance provider.
How To Cancel HP Finance Early?
HP finance, or Hire Purchase, is one of the other major car finance plans available. You will pay an upfront deposit of around 10% and then monthly repayments for the remaining 90%. At the end of the agreement, the car will automatically become yours without the need for a balloon payment like PCP.
An HP agreement can be ended early using voluntary termination, just like a PCP agreement. Again, you will need to have paid off 50% of the total amount, however with HP you are more likely to reach this point sooner as there is no balloon payment to consider. This means you will likely get to the halfway point of the term and have paid off 50%.
Just like with PCP, if you have not paid off 50% yet then you can still cancel early and pay the difference. It is also required that the car is in a reasonable condition in order to return it to the finance provider and end the plan.
A voluntary termination might appear on your credit report, but it is not likely to impact your credit score or your ability to be approved for finance in the future. If you do not arrange voluntary termination and simply stop making your repayments, then this will negatively impact your credit rating.