Want to know if you can cancel a PCP or HP agreement early? We take a look at your rights of voluntary termination.
Under UK law, you've a right to cancel certain types of car finance agreements early.
This is known as voluntary termination. Don't confuse it with voluntary surrender – which is something different and best avoided.
Looking for finance on a new car?
Car finance help during the Covid-19 pandemic
If you're having trouble making your car finance payments, help is available.
Your car finance lender should offer you a three-month payment holiday. Get in touch with them to sort something out. The amount you owe shouldn't change - you'll pay it back later is all. This is valid until 31 October 2020.
The Financial Conduct Authority (FCA) said that lenders should be fair to customers. So they shouldn't try to repossess your car if you're struggling to make payments.
And they shouldn't change your agreement if it makes things unfair for you.
Different lenders will have their own ways of helping people hit by the lockdown. So the best option is to speak to your lender and explain the situation.
When would you end a car finance agreement early?
There are many reasons why you might want to cancel your finance deal early. Here are just a few:
- You might have a change in your circumstances that means you can't afford the monthly repayments
- You don't need the car anymore
- You want to get a new car and the best way is to cancel early and get a new finance deal elsewhere.
If you're looking for a new car and want to see how much your monthly repayments could be, check out our car finance calculator.
Know your rights to voluntary termination
Section 99 of the Consumer Credit Act 1974 sets out when you can voluntarily end a hire purchase (HP) or personal contract purchase (PCP) agreement. It covers both new and used cars.
The law is there to help protect people who've taken out a finance agreement, but at some point became unable to afford their monthly repayments.
This may occur for a number of reasons, such as if you lose your job, or have some other change in your financial circumstances that means you can’t pay your car finance agreement.
While, as mentioned, the law covers both PCP and HP, the two types of finance agreement are slightly different in how they work.
PCP agreement is one of the most popular types of car finance.
With this sort of finance you’re required to pay an initial deposit, followed by a series of monthly payments.
At the end of these monthly payments you have two main options.
If you wish to own the vehicle, you’ll need to pay what’s known as a balloon payment. Once this is paid, the car will be yours.
If you don’t want to keep the vehicle, you can hand the car back. Many people then choose to start another PCP agreement.
How can I end my PCP early?
PCP agreements can be ended early so long as you’ve paid 50% of the total finance amount back to the finance company.Note the total finance amount will include any interest and fees that you have to pay too.
Perhaps most importantly, it will include the balloon payment.The balloon payment is important because it means you probably won’t pay 50% of the total finance agreement by the mid-way point of your monthly repayment schedule.
Or, in other words, you simply can’t get half way through the agreement and then decide to stop – you have to take into account the balloon payment too.As well as the 50% repayment, you must have taken reasonable care of the car. This means there are no damages (other than normal wear and tear).
If you tick these boxes, you can cancel the agreement.
What if I haven’t reached the 50% mark yet?
If you haven’t repaid 50% of the total finance amount, you can still end the agreement early by paying off the difference.For example, if you’ve already paid back £15,000 and the total finance amount is £40,000 – you’ll have to pay an extra £5,000 to reach the 50% mark.
If you’ve already paid more than 50% back, you can voluntarily terminate your PCP agreement. But you won’t get any refund.
HP is another popular type of car finance agreement.With a HP agreement you usually need to pay an initial deposit - which tends to be around the 10% mark – followed by a number of monthly repayments.
Once you’ve finished your monthly repayment schedule, you then own the car. Unlike PCP there's no balloon payment to pay at the end.Note that HP is a type of secured loan. The security is the car you're buying - so if you don't keep up with the repayments, your car may be taken away.
Can I end my HP agreement early?
In the same way that you can end a PCP agreement early, you can end a HP deal too.
This means you must have repaid 50% of the total finance amount.
However, with a HP agreement you’ll usually reach the 50% repayment point about halfway through the agreement.
If you haven’t repaid 50% of the total finance amount you can make up the difference, and then cancel.
The same rules on the car being in a good condition usually apply to HP too.
Does voluntary termination affect my credit score?
Voluntary termination may appear on your credit file. But it’s unlikely to make any difference to your credit score or your ability to get finance in the future.
If you’re struggling to keep up with your car finance repayments it may be tempting to simply stop paying, thereby falling into arrears.
You should try to avoid this if at all possible, as this is likely to harm your credit score. This could make it much harder to get finance in the future.
You may also be hit with increased interest charges in the process.
So for a number of reasons, voluntary termination tends to be the much better option.
Things to know before you apply for finance
Before you enter into any finance agreement it’s worth doing your sums - and always read the small print.Some finance agreements charge extra fees to cancel early, so it’s better you know about these from the outset. These will be detailed in the contract.