Ending a Car Finance Agreement Early

If you have a car on finance then you may be wondering whether you can end the finance agreement early. The good news is that under UK law you have the right to cancel your car finance early. The process is called voluntary termination.

What is voluntary termination?

Voluntary termination is when you end a finance contract on a car before the agreement ends. There are a number of reasons why you may want to do this. You could be having trouble making the monthly payments due to a change of circumstances. Or it could be that you’re looking to buy a different car.

How to cancel car finance

The way to voluntarily terminate a finance agreement on a car differs depending on the type of finance you have taken out. The two main types of finance available are Hire Purchase (HP) and Personal Contract Purchase (PCP).

Can you cancel car finance early?

In a word, yes. Section 99 of the Consumer Credit Act sets out clearly that you can voluntarily end an HP or PCP agreement on a car. This applies to used cars as well as brand new ones.

As with most finance agreements these days, car finance agreements come with a 14-day cooling off period. This means that if you are within 14 days of signing the contract then you can legally cancel the contract with no financial penalties.

The point of section 99 of the Consumer Credit Acts is to protect the consumer in the event that they take out car finance but at some point in the future are no longer able to afford the monthly payments on the agreement.

There are a number of reasons why this could happen. You could lose your job after signing the contract, or other personal circumstances could change meaning that you can no longer afford the monthly cost of the car. There are also other reasons why you might want to end your car finance agreement. You may no longer want or need the car. Or you may want a new car and the best way is to cancel your existing agreement and get a new deal elsewhere.

Ending a PCP agreement early

PCP is the most popular way to finance a car. Typically you pay an initial deposit followed by monthly payments for the duration of the agreement.

At the end of the agreement you usually have two options. You can pay a final payment (also known as a ‘balloon’ payment), and keep the car. Or you can simply hand the car back.

Most people hand the car back so that they can get another new car. This is why many people tend to get a new car every 2 or 3 years.

Providing you have already paid at least 50% of the total finance back to the company you can end your PCP agreement. The total amount of finance includes any other fees associated with the finance, as well as any interest that the finance company charge. It also includes the balloon payment.

Don’t forget the balloon payment

It’s important to consider the balloon payment when calculating how much of the finance you have paid already. The fact that there is a balloon payment means that you may not necessarily have paid 50% of the finance back by the time you have reached the mid-point of your contract.

If your initial deposit was the same amount (or more) than the balloon payment, then you will likely have paid off 50% or more of the finance by the mid-point of the agreement.

It’s also worth remembering that you are contractually obliged to have taken reasonable care of the car for the duration of the agreement. Normal wear and tear commensurate with age is acceptable, but there should be no other damage to the vehicle.

Providing these conditions are met then you can legally cancel your car lease.

Ending an HP agreement early

HP is a bit different to PCP, in that there is no balloon payment at the end. You can take out a HP agreement when you purchase a new or used car.  The car itself acts as the security on the loan. So if you don’t keep up with the payments then the finance company will be able to take their car back.

Normally there is at least a 10% initial deposit on an HP agreement. You then make monthly payments until the balance is paid off. There’s no balloon payment so once you’ve completed the agreement you own the car. You can then keep it, sell it or do whatever you want with it.

Cancelling an HP agreement early is similar to cancelling a PCP agreement, in that you need to have paid at least 50% of the finance off. The main difference with an HP agreement is that the lack of balloon payment means that you will have paid off 50% of the finance by the time you get to the mid-point of the agreement. The larger the initial deposit, the sooner you will have paid 50% of the finance off.

Can I cancel my car finance before paying off 50%?

Whether you have an HP or PCP agreement, you can cancel your car finance before paying 50% of the balance. However you will need to pay the difference. So if you take out £30,000 finance for a car and have paid back £10,000 you will need to pay an additional £5,000 in order to voluntarily terminate the agreement.

If you have already paid more than 50% of the total outstanding finance then you’ll be able to voluntarily terminate the agreement when you wish. It’s worth noting that the finance company is under no obligation to return any money that you have paid over the 50%.

Can I change my car early on PCP?

If you have a PCP agreement and wish to change your car within 14 days of signing the contract then you will be able to contact the lender and arrange to return the car.

If you are more than 14 days into the agreement then you will need to contact the lender and ask them for a settlement figure. You then have a choice. You can either:

1. Pay the settlement figure amount. You will then own the car outright so you can sell or part-exchange it to buy a new car. Or
2. You can trade your current car in for a new one on a new PCP contract.

Providing the current market value of your car is higher than the settlement amount you’ll be able to pay off your finance agreement and you’ll have some money left over.

If the car is worth less than the settlement amount then you are in negative equity with your car and are responsible for paying the shortfall.

Are there any charges for voluntary termination?

You have the right to cancel – without charge – an agreement when you have paid more than 50% of the finance owed.

If you haven’t paid 50% then you are required to make up the shortfall. After doing so there should be no extra fees for voluntarily terminating the car finance agreement.

Remember you are contractually obliged to look after the car, so any damage other than fair wear and tear may be chargeable. If you believe you have been unfairly charged for voluntarily terminating car finance then you can appeal the charges.

How long does it take to cancel car finance?

The amount of time it takes to cancel car finance will vary depending on a number of factors. Such as the lender, your personal circumstances and the condition of the car. Check your contract or agreement for timeframes or speak to your finance provider if you’re still not sure.

Will cancelling car finance affect my credit score?

The fact that you’ve voluntarily terminated a finance agreement will be likely to appear on your credit report. It won’t affect your ability to get finance in the future though.

Avoiding making the payments that you are contractually obliged to pay will affect your credit report in a negative way, making it much more difficult to get finance in the future. This applies to any kind of finance like bank loans and mortgages as well as car finance. If you simply stop making payments you may also be liable for added fees and interest payments.

It’s always better to voluntarily terminate a finance agreement than to imply stop making the monthly payments.