Car finance: what is voluntary termination?

Financing your car on PCP or Hire Purchase and need to hand it back early? Voluntary termination could help you do it

Christofer Lloyd
May 31, 2019

Finance a car on PCP finance or Hire Purchase and you’re committed to making all the monthly payments. However, if your circumstances change and you’re no longer able to afford the car, there is a way to disentangle yourself from the remaining payments.

This is called voluntary termination (VT) and it applies in certain circumstances, to prevent you from financial hardship. So, if for instance, you lose your job and your income drops dramatically, you could take advantage of VT to avoid making your financial situation worse.

When is voluntary termination possible?

VT applies to both new and used cars. To hand a financed car back early under voluntary termination, you must have paid at least half of the ‘Total amount payable’ on the finance. This includes not only the amount you borrow, but all the interest and fees applied on top.

With PCP that figure also includes the large optional final payment, which in itself could be more than half the value of the car. As a result, you are likely to get to this stage only if you’re towards the very end of most PCP finance contracts - or potentially never get there at all on shorter contracts or with cars that retain their value particularly well.

In contrast, the 50% point is around the middle of a Hire Purchase contract, as you pay the debt off faster with this type of contract. If you’re leasing a car, however, voluntary termination is not possible. You may be able to negotiate to hand the car back early, but you’re likely to incur charges to do this and it is down to the leasing company’s discretion.

No additional charges can be issued with voluntary termination

Unlike simply handing a car back at the end of a finance contract, no charges for damage above normal wear and tear can be charged when using voluntary termination.

This means that, as long as you’ve paid more than 50%, you should be able to return the car without anything else to pay. Meanwhile, if you haven’t paid 50% yet, you can pay the extra to get to that point and be able to use the voluntary termination option.

Similarly excess mileage charges are not enforceable if you use VT, though you can expect many finance companies to threaten legal action repeatedly in an attempt to reclaim the income they’ve lost through you cutting the contract short and/or damaging a car or having exceeded the mileage limit you signed up to.

Voluntary termination should have no impact on your credit rating

Not only shouldn’t you have additional charges to pay with VT, but there shouldn’t be any black marks left on your credit rating. Lenders will be able to see that you’ve handed a car back early, however, and some may refuse to finance you again or charge higher rates - especially if you’ve used VT multiple times - in fear of you doing it again, before you’ve paid back the whole amount you owe.

Finance companies may make it difficult to use voluntary termination

While drivers using PCP finance and Hire Purchase have a legal right to end these finance contracts early in certain circumstances, many finance companies may try to prevent - or at least delay - you from doing this.

This is understandable, as VT costs them money as you’ll typically be handing a car back before you’ve paid enough to cover the value it’s lost. And the longer a company prevents you from using voluntary termination, the longer you have to keep paying for the car.

Be aware, however, that one thing that may stop you from being able to use voluntary termination is if you’re behind with your payments. Consequently, if you think you may have to return your car early, it’s important to make sure that you keep up to date with your payments until you have terminated the contracted.

Fail to do this and you could be pushed into handing the car back and still being liable for the remaining payments, through another mechanism for ending the contract early.

            

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