If you are one of the thousands of people across the UK struggling to meet their car finance repayments, are you aware you can give the vehicle back and walk away debt-free once you have repaid half the amount owed?
Car finance payments are typically the second-largest household expense after mortgage costs, and the car industry is nervously waiting to see how many people struggling with the cost of living default on loans, or use a little-known clause to voluntarily terminate their agreement.
In recent years more than 90% of new car purchases and an increasing number of used cars have been bought on finance agreements – in most cases through personal contract purchase (PCP) plans that offered attractively low monthly payments.
The size and scale of the outstanding loans taken out by Britons in recent years is nothing short of extraordinary. According to an analysis by the Car Expert website, in total they have been worth about £40bn a year – up from £11bn in 2009. The website says the average amount financed for each new car has more than doubled in the last decade to £25,000-plus. Used car purchases are now almost as likely to involve a PCP agreement.
“The car industry has become utterly reliant on people buying cars they don’t need with money they don’t have. The problem, of course, is that if people no longer have the means to borrow, the car industry will collapse. It was a genuine concern during the Covid shutdowns and remains a risk today as the cost of living spirals,” says Stuart Masson, the site’s editorial director.
Buyers were sold cars on the basis that monthly payments were low and affordable. However, in order to keep the car at the end of the three- or four-year term, a final “balloon payment” (the estimated future value of the vehicle) must be paid. This payment will depend on the car, but can run to thousands of pounds.
In the past, buyers would simply trade in, and sign up for another PCP, or give the car back to the finance company, in the hope that its actual value would pay off the loan.
However, for those struggling to get to the end of the loan’s term, or those who know their car’s value won’t cover the final balloon payment, there is another option, although car dealers rarely publicise it.
The right to voluntary termination is enshrined in the Consumer Credit Act and allows the buyer to escape the agreement provided they have repaid 50% of the total amount payable, and the car is not damaged and in a “reasonable” condition. It applies to used and new cars bought on finance.
Before people get too excited, they need to be aware that it is not 50% of the contract’s duration, nor 50% of what you originally borrowed, but half of the total amount owed, including interest.
Those with a PCP agreement won’t usually reach the voluntary termination point until late in the contract – usually the last few months – because of the final balloon payment.
Buyers who used a hire purchase agreement will usually get there earlier, about halfway through the agreement.
The total amount payable and termination amounts have to be shown on the car finance contract, so dig it out and check the figures. Buyers can’t have missed any payments until the voluntary termination.
“The finance company will quite probably lose money when you terminate your finance agreement, so they are not exactly going to go out of their way to help you,” says Masson, who has published a guide on how to do this.
“They may try to charge you for damage that would not be considered ‘reasonable care’, and will often use this clause as an excuse to try to pin you for excess mileage. Usually this involves threatening letters and large invoices for minor scratches or excess mileage. There will often be various forms and legal jargon to try to scare you into paying up.”
The consumer legal advice forum LegalBeagles has some excellent advice about documenting your car’s condition with dated photographs to prove it is in “reasonable” condition when you give it back. It also has a template letter you can send to your finance company to start your voluntary termination.
A voluntary termination will not affect your credit score or credit rating. However, some finance companies may decline any further finance applications from you, Masson says.
One last thing to be aware of is the big difference between voluntary termination and voluntary surrender.
Under a voluntary surrender made before the 50% threshold has been reached, you give back the car but still owe whatever is left to pay according to the original contract. The finance company will sell the car at auction (adding on extra costs for collecting and disposing of the vehicle) and then pursue you for the difference.
The Finance & Leasing Association, the trade body that represents the companies, advises people struggling to pay their car loan to talk to their lender at the earliest opportunity.
During the Covid pandemic, drivers were given payment holidays, and lenders will want to talk to struggling customers to find a solution.