- Published 2 December 2019
- 3 minute read
- By Gavin Braithwaite-Smith
The overwhelming majority of new cars are bought on finance, with consumers tempted into showrooms by the promise of a low deposit and even lower monthly repayments. But what happens if you decide to cancel a car finance agreement?
There are many reasons why you might want to terminate your car finance. Maybe you can’t afford the monthly payments or you no longer need the car. Perhaps you’re moving abroad or simply fancy driving something different. Whatever the reason, you need to think very carefully before terminating your contract.
The good news is that the law is on your side. Section 99 of the Consumer Credit Act of 1974 includes a reference to a voluntary termination clause, which is your right to cancel a hire purchase (HP) or Personal Contract Purchase (PCP) deal early. The law is there to protect those who are unable to keep up with the monthly repayments.
The process is slightly different for each finance method, so we’ll deal with each one in turn.
How to cancel a PCP finance agreement
Always read the small print to check get-out clauses
PCP is an incredibly popular form of new car finance, with buyers paying a relatively small deposit followed by a succession of manageable monthly payments. At the end of the agreement, which is typically three years, a consumer can purchase the car using a pre-agreed final payment or walk away.
If you’re struggling to meet your payments, it’s possible to cancel a PCP contract using voluntary termination, which is preferable to going into arrears, which will affect your credit score and ability to secure finance in the future.
The key thing is you must have repaid more than half the amount owed, including interest and fees. Be aware that because a significant chunk of the purchase price is tied up in the optional final payment – also known as the Guaranteed Minimum Future Value (GMFV) – the midpoint of the contract could be much later that you realise.
If this is the case, you’ll be asked to make up the difference to the 50% point, including any interest or fees. You won’t get any money back if you’ve paid more than 50% of the total due.
If you find that the car is worth more than the remaining payments, it might be worth asking the dealer for a settlement figure to purchase the car outright, then selling the car privately. Alternatively, if you like the car and can afford the final settlement, simply buy it and run it.
Note that you’re expected to maintain the car to the standards laid out in the PCP contract, which includes the annual mileage limit. Any damage or excess mileage will incur a financial penalty that will need to be settled before the contract termination is complete.
How to cancel an HP finance agreement
Monthly deals are great, but know your rights
Hire purchase (HP) is a more traditional form of car finance, with ownership of the car transferring from the lender to the registered keeper at the end of the agreement. There’s no optional final payment, just a deposit at the start of the contract and a series of set monthly payments.
It’s possible to cancel an HP agreement once you have repaid 50% of the total finance amount. This tends to be around the mid-point of the contract as there’s no ‘balloon’ payment at the end.
Check the terms and conditions of the finance agreement as there might be admin or early cancellation fees to pay.
How to cancel a lease (PCH) agreement
Personal contract hire (PCH) deals are harder to cancel
Lease agreements are not designed to be broken, so there are substantial penalties and fees associated with early cancellation. With this in mind, you’re advised to think carefully before entering a lease agreement – if there’s any doubt that you might not see out the contract, you should consider an alternative form of car finance.
Early termination of a lease agreement – also known as Personal Contract Hire (PCH) – is at the discretion of the finance provider. You could be liable for the entire lease, while some lenders will impose a fee of 50% of any outstanding rental period. Other lenders will consider cancellation on a case-by-case basis.
If you’re struggling to meet the payments, it’s worth speaking to the finance company about extending the length of your contract. This should lower the monthly payments, making it easier to manage your household budget. It will almost certainly work out cheaper than an early termination.
Make sure you read the policy before signing a lease agreement – the fees associated with early cancellation will be outlined in the document.
Will voluntary termination affect my credit score?
Ending a finance agreement will affect your credit rating, but shouldn’t affect your ability to get finance. However, because early cancellation is a headache for dealers and lenders, you might be offered fewer deals if you consistently use voluntary termination.
In all cases, it pays to think ahead before entering a finance agreement. Circumstances change, so is it wise to lease a two-seater sports car if you’re considering starting a family? Equally, given the anti-diesel legislation and shift towards electrified vehicles, will a diesel car be appropriate in three years’ time?
At the very least, cancelling a car finance agreement will be a hassle, and will almost certainly result in a financial penalty of some sort. Our advice would be to work out what you can afford now and how much of an impact this will have on your household budget.
Remember to factor in the cost of insurance, fuel, maintenance and tax, and remember to give yourself a buffer to allow for any changes in income and unexpected bills. Finally, shop around for the best deal – it’s a buyers’ market, so use this to your advantage.
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