What is Voluntary Termination?

Whether your circumstances have changed and you’re finding it hard to make your car finance payments, or you’ve just changed your mind about your car, you’ll want to know if it’s possible to cancel your car finance and give your car back to the finance company.

The good news is that you do have the right to cancel your car finance without paying any penalties. You can do this during the “cooling off” period soon after you take out a contract, or through a process called voluntary termination.

In this article we’ll explain how and when you can cancel car finance, whether you have hire purchase, personal contract purchase (PCP) or a lease car.

» MORE: Types of car finance

What is voluntary termination?

The Consumer Credit Act 1974 entitles you to end a finance agreement through voluntary termination. This gives you the right to legally end your car finance agreement early and hand your car back to the finance company without needing to pay any fees.

However, to be able to apply for voluntary termination on your car finance, you need to have paid at least 50% of the total amount repayable, i.e. the cost of the car, the interest on the loan, and any fees.

How does voluntary termination of car finance work?

If you want to end your car finance early through voluntary termination, you will need to write to your finance provider to tell them your decision, either as an email or in a letter. The finance provider should then let you know the next steps and arrangements for returning the car.

Bear in mind that, because finance providers will lose out financially when you end an agreement this way, you may face some obstacles when applying for voluntary termination. If you need further help with applying for voluntary termination and cancelling your finance, you can get free guidance from Citizens Advice.

To end your car finance through voluntary termination, there are some conditions you need to meet.

Firstly, you will need to return the car in good condition and within any mileage limits set in your contract. If there is any damage beyond reasonable wear and tear, you may face extra charges.

You will also need to have repaid at least 50% of the total cost of the finance. If you haven’t yet paid half, you can pay the amount required to make up the difference. If you have paid more than 50%, you won’t get any of this money back.

With hire purchase and conditional sale, you should have repaid 50% of your total finance by around the half-way point of the contract. However, this is unlikely to be the case with PCP finance agreements.

Voluntary termination of PCP

You can only use voluntary termination once you have repaid at least 50% of the total amount you owe on your finance agreement, and this includes the final “balloon payment” on PCP.

But, because the monthly PCP loan repayments aren’t based on the total cost of the car, half of the payments won’t cover half of the total amount repayable. So you’ll tend to have repaid 50% of the finance later on in your contract.

For example, if the total amount repayable is £16,000, which includes the final balloon payment of £6,000, your monthly payments would cover £10,000.

So, when you are halfway through your contract and monthly payments, you would only have repaid around £5,000 in total, instead of the £8,000, you would need to qualify for voluntary termination.

As a result, you may only have repaid half of your PCP finance, and so be able to apply for voluntary termination, when you are nearing the end of your contract.

If you want to apply for voluntary termination of your PCP finance before you have repaid 50% of your loan, you may be able to pay a lump sum to make up the difference.

Can I cancel a car lease?

If you want to cancel a personal leasing plan early and return the car, you should be aware that you may need to pay the full amount remaining on your leasing agreement.

Make sure you find out what this cost would be before ending your plan. If you are struggling to pay the leasing costs then it’s best to speak to your provider to see if they can do anything to support you with your monthly repayments.

» MORE: How does leasing a car work?

Can I cancel my car finance deal within 14 days?

The Consumer Credit Act gives you 14 days to withdraw from a credit agreement, known as a cooling off period. This applies to all forms of car finance, and stands whether you applied online, on phone or in person.

A 14-day cooling off period begins when you agree to the contract and sign it. Loans above £60,260 don’t include a right to withdraw, so if you have a finance agreement for this amount or more, you won’t be able to cancel within the 14 day period.

Will cancelling car finance affect my credit score?

A voluntary termination might appear on your credit file, but it shouldn’t affect your credit score or impact your ability to get approved for finance in the future. Because of this, if you are struggling to keep up with your repayments, voluntary termination of your car finance would be a much better option than missing any payments.

However, if you use voluntary termination to end finance agreements too often, this will show up on your credit file and could make lenders more wary about lending to you.

» MORE: Does car finance affect mortgage applications?

Should I cancel my car finance?

The decision to cancel car finance shouldn’t be taken lightly. You may want to consider it if:

• You’re not able to make your car finance payments.
• You don’t need your car anymore.

Although you could theoretically use voluntary termination just because you want to change your car, this is not what voluntary termination is intended to be for. It is designed to help people who are struggling to make payments on their finance agreements, by offering them a way to withdraw from the contract without incurring any penalties.

Alternatives to cancelling car finance

Depending on your situation, using voluntary termination may not be the only option available to you. For example, you could:

• Pay off your car finance early, if you are able to. You could pay a lump sum to clear your finance, although you may need to pay an early repayment fee to do this. Once you clear your finance, you would own the car outright and could choose to sell your car if you wanted.

Especially if you have paid significantly more than 50% of your finance, it may make more sense to pay off the rest of it. It is important to remember that if you use voluntary termination, you won’t get a refund if you have paid more than 50%.

• Part-exchange your car. If you want to switch to a cheaper car finance deal or upgrade your car, you may be able to part-exchange your car and use any equity in the car towards a new contract. Details on how this could work will depend on how much equity you have in your car and will vary between providers.

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