Car finance: what is Voluntary Termination?

Finance a car on PCP finance or Hire Purchase and you’re committed to making all the monthly payments. So it's wise to make sure you can comfortably afford a car, and that it's likely to be suitable for your needs - for the entire length of the contract - before signing on the dotted line. However, if your circumstances suddenly change and you can no longer 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 as a result, you could take advantage of VT to avoid making your financial situation worse.

Keep reading to find out how to do this, check out the best used car PCP finance deals by clicking the button below or if you're looking to trade down to get lower monthly payments on your next car, read our guide to negative equity car finance.

Voluntarily Termination of car finance

VT applies to both new and used cars that have been financed using PCP finance or Hire Purchase. 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 borrowed, 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.

Remember, however, that you can pay the difference to top up the amount you've paid to the halfway mark at any point. Bear in mind that the earlier you are in the contract, the more this is likely to be, so this may not be a practical solution for you unless you have a lot of cash to hand.

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. This is because the deposit and monthly payments cover the whole value of the car with Hire Purchase and there's no large final payment left until the end.

If you have a car on a Personal Contract Hire contract - also known as leasing - 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 this is down to the leasing company’s discretion. Therefore, if you value the ability to hand your car back early, you'll have more flexibility with PCP finance.

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 fair wear and tear can be charged when using Voluntary Termination.

This means that, as long as you’ve paid more than 50% of the total amount owed, 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 amount 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. However, 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 the car/having exceeded the pre-agreed mileage limit - as you would have broken the terms of the contract you signed.

Voluntary Termination should have no impact on your credit rating

Not only should you not have additional charges to pay with VT, but there shouldn’t be any black marks left on your credit rating. Consequently, if you are having trouble affording the car, VT can be a sensible way to hand the car back early and make sure you don't get into debt or spiral into further debt.

Lenders will be able to see that you’ve handed a car back early, however, and some may refuse to offer finance to you again or charge you higher interest rates. That's especially the case if you’ve used VT multiple times - as the lender may fear you doing it again, before you’ve paid back what you owe them.

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 has 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, make sure you start the process as soon as possible, as it’s important to ensure that you keep up to date with payments until you have terminated the contract.

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, which could make your financial situation much worse.