If you are on a Hire Purchase (HP) or Personal Contract Purchase (PCP) deal, you are entitled to voluntarily terminate the car finance agreement and return the car to the finance company.
Provided your payments are up to date, you have paid one-half of the total amount payable in terms of the agreement, and taken reasonable care of the car, you will not have to make any further payments. You can find this one-half figure in every hire purchase and conditional sale agreement.
Simply put, voluntary termination (VT) is the option to end your car finance agreement earlier than the length of the term, providing that you have paid at least 50% of the repayments and your car is in good condition.
Do you have car finance and want to get into something new? We could help you settle your current car finance agreement and get a better deal.
You have a legal right to end a car finance agreement early under the Consumer Credit Rights Act 1974. You should check the terms and conditions of your car finance agreement before purchase to ensure it's there.
It is a statutory right and cannot be restricted or excluded from your contract. If unsure, speak to the car dealer or salesperson you're dealing with before signing anything.
Reasons for voluntary termination
Can't afford to keep up with payments
You may want to file for voluntary termination if personal circumstances have changed and you can't afford to make the monthly repayments.
With the ongoing cost of living crisis, continuous inflation rises, and more, it's becoming increasingly hard for those with car finance to keep up with the payments on top of everything else that is required.
Heating your home, especially as we're approaching winter, putting food on the table, and taking care of your family is a much higher priority than car finance; some may not be able to afford to do everything.
It's great to have the option to be able to do this, provided you have paid off over 50% of your finance, so if you are in a position where you can't afford your car, you could look into the voluntary termination option.
Alternatively, you could refinance your current deal and continue to keep your car, but you stretch your payments out over a longer period, so you repay less per month.
Looking for a new car
You may decide that your car no longer suits your needs and want to get into something different. Whether that be because you need more space or you don't want your current vehicle, voluntary termination could be an option for you.
Car finance allows you to control your finances, regardless of your circumstances, and the flexible options available make it a viable choice when buying a car.
You could also part-exchange your car to get into something new. It would mean you settle your current finance deal with your lender and any profit goes into your new vehicle as the deposit. It's generally only possible if you are in a positive equity position.
How does voluntary termination work?
If you are either on a PCP or HP deal, you could look to terminate your car finance deal. It's a much better and sensible option than falling behind on your payments - if affordability is the reason to VT.
If you miss payments, this will affect your credit score and history, likely making it harder for you to borrow money again. Therefore, VT is an option to avoid that slippery slope.
You are eligible if you have paid off at least 50% of your car finance deal to date, or if you haven't achieved that yet, are willing to put money in to round up the total owed to 50%.
If you have paid over 50% already and decide to VT, you won't get the difference returned to you. For example, if you VT after paying 65% of your finance, you won't be owed 15% by the lender.
How can I start a voluntary termination agreement?
Voluntary termination isn't something lenders are too keen on - though they have to honour it due to the terms in your contract - as it means they will be missing out on 100% of the repayments plus interest.
But if you do decide you wish to undertake VT, the process should be relatively quick. It all depends on your circumstances and how quickly the lender decides they want to process it.
You can make it easier for yourself - and the lender - by ensuring you meet the VT requirements and triple checking your contract before reaching out to them to begin.
Ensure you have paid off at least 50% of your finance and the car has no wear and tear issues that could affect your request. The better prepared you are, the quicker the lender will be inclined to help.
Make it clear to the lender that you wish to enter 'Voluntary Termination' and not 'Voluntary Surrender' (VS). VS involves handing the car back to the lender, who then sells it. You are still required to make up the difference between what they sell it for and how much you owe.
What happens if something goes wrong?
It's unlikely that something goes wrong with the VT process, provided you've paid off over 50%, the car is in good condition, and the lender is happy with everything.
However, the main stumbling block that could affect the process is the general state of the car. Taking pictures of your vehicle every few months, regardless of whether you plan on undertaking VT, allows you to keep a check on its condition.
The wording in the contract about VT is generally vague, and you'll want to ensure you cover yourself if you go for it, and images with timestamps will help you claim.
If you are in positive equity, the best option may be going down the early settlement route, particularly if you are going straight into a new car.
If your financial situation isn't good, and you want to get rid of the car, early settlement may not be viable as you will have to use your own money to do this.
Also, consider your agreed mileage limit and how many miles you have done in your car. Lenders may charge you if you exceed it, or they may calculate your usage on a pro-rata calculation, so even if you think you're ok, it may not work out that way.