PCP or HP Finance: Voluntary Termination


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By Crispin O'Toole-Bateman

on Wednesday 29 August 2018


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How to Get Out of a Car Finance Agreement

If you can no longer afford the payments on your car, for whatever personal reason, it may be that you need to terminate your contract with your leasing company early.

You may be unsure about how voluntary termination works and, of course, being in this position may cause you some worry and undoubtedly, you might have many more questions.

At Complete Leasing, we are here to help with the following queries and topics:

What is Voluntary Termination?

What are My Consumer Rights?

Understanding Depreciation

The Half-Way Mark

Does Voluntary Termination Affect My Credit Rating?

Additional Penalties

What is Voluntary Termination?

If you can no longer afford your car, there are a few different circumstances regarding returning it, depending on how you act. The worst of these situations would be having your vehicle repossessed, which can happen if you bury your head in the sand and just stop paying. On the brighter end of the scale is Voluntary Termination (VT) of your car finance agreement.

VT is a perfectly legal aspect of the arrangement which you are entitled to do under the terms of the contract and it offers you multiple rights in a lease, according to the law.

What are My Consumer Rights?

If you have a purchase-based finance arrangement – that is, you have the option to own your car in full at the end of the contract - you are a consumer and the Consumer Credit Act 1974 is in place to protect you.

Consumer rights apply if you have a Hire Purchase (HP) agreement or a Personal Contract Purchase (PCP) agreement with the finance company.

It is important to note that you are not offered the same cover with Personal Contract Hire (PCH) or a business leasing arrangement, as these are long-term hire contracts where you do not have the option to buy at the end and you are therefore not a consumer.

Section 99 and Section 100

Sections 99 and 100 of the Consumer Credit Act (1974) state how you are entitled to voluntarily terminate the car finance agreement early, and you are ultimately liable for paying only 50% of the total value of the purchase.

What this means is that if you have already paid enough monthly payments to cover half the cost of the car, you will not be liable for any more money regarding paying for the vehicle (though there may still be penalties regarding the car wear and tear or excess mileage).

If, however, you are yet to pay the finance company as much as 50%, you will be liable for that amount.

Just keep in mind that these consumer rights only apply to those who have signed a hire purchase (HP) or personal contract purchase (PCP) agreement.

Understanding Depreciation

It is commonly known that as soon as a brand new car leaves the forecourt, the car loses value and continues to do so over time.

What is less understood is the rate at which the car depreciates.

Most of the worth of the vehicle is lost during the first year of ownership. Approximately 40% of vehicle depreciation happens in that initial twelve months, with a further 20% on average happening during the following two years. Ultimately, at the end of a three-year period, the car is likely to have dropped in value by 60%.

Understandably, the leasing company has a right to be compensated for that drop in value. When you return their car to them, it is typically sold on at an auction in an attempt to recoup the remaining amount and they are unlikely to get more than its depreciated value at that time.

Consequently, if you break your contract one year in, you will have almost certainly paid less to the finance company than the amount the vehicle has depreciated. Once you approach the three-year mark, that difference is considerably less, and you will have probably covered the depreciation.

This ensures that the depreciation is accounted for and paid for by you, which explains why the 50%-rule in the Consumer Credit Act exists.

Not only is it looking after you as a consumer and your right to voluntarily terminate the contract, but it is also looking after the finance company and ensuring they are not forced to lose money due to depreciation.

For more detail on this topic, read our complete guide Depreciation Explained.

The Half-Way Mark

Part of your contract will state and explain your rights if you decide that a voluntary early termination of the car finance contract is necessary.

An important figure shown there will be your ‘half-way mark’ (50%) amount. This is the total amount payable that the Consumer Credit Act will use as protection for both parties.

Your liability ends if your payments have added up to pass this half-way mark.

Example:

If your half-way mark is set to £6,308.90 and you have been paying £229.30 per month, you will have passed the half-way mark on your 28th payment – at that point you will have paid £6,420.40. If you initiate a voluntary termination then you will have nothing more to pay on the car.

If you have only been paying for 13 months, however, you will have only covered £2,980.90 and will be liable to the finance company for the remaining £3,328.00.

Remember that even though sections 99 and 100 are there to limit the payments regarding the value of the vehicle, they do not cover you for additional penalties regarding damage to the car, or excessive mileage.

Does Voluntary Termination Affect My Credit Rating?

In short, the simple answer is no.

You are completely within your rights to enter into an early termination of your car finance contract with no negative affect on your credit record whatsoever.

As long as you have contacted the finance company and instructed to them that it is in your desire to initiate a VT and have not missed any previous payments on the account, then there will be no impact to your credit rating.

Situations that can, and most likely will, have a negative impact on your credit score include:

  • Stopping direct debits without contacting the finance company
  • Previously missed payments
  • Previously late payments
  • Not settling any final amounts you are liable for
  • Having the car repossessed
  • Having any debt passed to a third-party collection agency

Remember, communication is really important if you want to end your car finance agreement early. Make sure you speak to the finance company as soon as you find yourself in any level of difficulty.

Additional Penalties – Fair Wear and Tear, and Mileage

Protection under the Consumer Credit Act is there to cover your liability regarding the item purchased (in this case, a vehicle).

It is fair for the finance company to expect the car to be returned to them in a near-perfect condition, taking into account the BVRLA fair wear and tear guidelines, even in the event of voluntary termination of car finance.

What this means is that anything which has damaged the vehicle in any way, from a large dent in the door to a small tear in the seat fabric, is chargeable to you. And, of course, there’s every chance that if there is a problem, they will find it.

For these reasons, it is important that you do everything you can to return the car to them in the best condition possible. It is often worth taking it for an MOT and fully valeting it before returning it – yes, these things will cost you money, but they can end up saving you in the long run.

Take plenty of photographs as evidence of the car’s condition prior to returning it. Make sure they are date-stamped and hold onto them and any other paperwork in case of any dispute.

Mileage

Your lease agreement will have a yearly mileage limit. The allowed mileage will be calculated pro-rata by the finance company and you will be liable for a standard penalty for going over your mileage limit if you have exceeded it.

It is worth finding out in advance what that excess mileage penalty is and taking account of it before you enter voluntary termination.

For more information and detail on mileage, read our guide Car Leasing and Mileage.

More Information Regarding Cancelling Your Car Finance Agreement Early

If you have any questions, do read our other resources here at Complete Leasing regarding early termination, or give us a call for expert advice on your specific situation. Remember, communication and understanding at an early stage can avoid a nasty situation later on – it’s never the right thing to ignore a problem and hope it goes away.

 

Useful Guides:

Ending a Vehicle Lease Early

Personal Contract Purchase (PCP)

Hire Purchase

PCP, HP and PCH Explained

Depreciation Explained

Car Leasing and Mileage

 

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