A reader asked:
I want to terminate my PCP car finance. The car’s fine, good condition, but we now need a bigger car. According to my contract I can hand it back.
But I am going to need to get another car, so I am worried this will harm my good credit record. Would part exchange be better?
Your right to end a PCP contract early
Personal Contract Purchase (PCP) is the most common way to buy a new car in Britain in 2017. Although it is sometimes called “leasing” this is misleading – it is actually a form of Hire Purchase (HP).
HP agreements allow you to terminate them and not pay more than half or more of the total amount due under the contract. This termination is often called Voluntary Termination, shortened to VT. This has to be included in every HP agreement, including PCPs, under the Consumer Credit Act 1974. If the car is in good condition, you shouldn’t have to pay any more.
But is this a good idea? or, as the reader asks, is it better to try to get a part exchange deal on your next car?
When can you VT and not owe any money?
Under HP contracts which aren’t PCP, you reach this half way point about half way through your contract.
For PCPs the Guaranteed Future Value is included in the “half way” calculation because it is part of what you would pay to buy the car. As a result, many PCP contracts can’t be terminated without you owing money until much later in the contract.
Your car finance paperwork will include details of how much you have to have paid to reach the 50% figure. You can terminate the contract earlier than this, but then you will still owe the difference between what you have paid and the 50% figure.
This isn’t “breaking the contract”
The finance contract has a clause that allows you to end it, so VTing isn’t breaking the terms of the contract. It’s not like handing back the keys of a house to a mortgage lender, when you would get a default on your credit record.
The finance company probably won’t be pleased but if you have paid the 50% figure or more, your credit record will show the debt as settled, with no arrears (assuming you had kept up with all the payments so far) and the balance owing set to zero. So your credit record isn’t harmed.
The car finance company may add a voluntary termination marker to your credit report, explaining why the contract was settled early. This sort of flag isn’t used when the credit reference agencies such as Experian calculate your credit score.
I’ve seen some people say it can then be hard to get finance from the same company again. Another car finance company could see the VT marker and refuse to lend to you, but I’ve not come across reports of this happening and there are plenty of stories of people VTing a car and getting another car on finance straight away.
Of course, if your credit record isn’t good, there could be other reasons why you would be turned down for a new car finance.
Is terminating better than part exchange?
Your other option is to part exchange your current car. Here the dealer selling you the new car will settle the finance with the existing lender for you.
If your car is worth more than you owe on the contract you can use this equity as a deposit towards the next car. This is more likely if you put down a big deposit at the start of your current contract and the interest rate is very low. Most cars financed through PCP will not have any equity until near the end of the contract.
If the car is in negative equity – you owe more than the car is worth – it may be possible to carry this over to the new contract. You need to look closely at this as it could be making your future problems worse, see this article on The Car Expert’s blog: Negative equity in Car Finance – why it’s a problem.
As a rough rule of thumb, the more negative equity there is, the more likely it is to be better to VT the contract rather than part exchange.
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Chris says
I did a VT on a car I had with The Car Finance Company, they said they wouldn’t re-lend within 6 months but I was approved through Moneybarn so no issues there. A lot will depend on internal policy of the finance company
S says
what impact will arranging a voluntary arrangement have on my credit score? I have new finance pre agreed for a new car, but have the choice of VT or trying to PX the car and get the dealer to cover the settlement figure on the original car… Trying not to damage credit score so appreciate any advice
Sara (Debt Camel) says
Neither VT or PX will damage your credit score.
As the article above says “As a rough rule of thumb, the more negative equity there is, the more likely it is to be better to VT the contract rather than part exchange.” VTing effectively gives you a clean start again.
S says
thanks for the reply..interesting that the finance company i am with currently has stated that carrying out a VT will damage my credit score!!!!
Sara (Debt Camel) says
Well guess what, they don’t want you to do it because it will cost them money. They would rather you took out a bigger loan. Have they said this in writing?
Have you looked at the loan documentation you were given at the start? This should have stated very clearly your right to end the agreement, for example in a paragraph headed “Termination Your Right”.
Edward says
I had a hire purchase car, and I handed it back after 3 and half years over 5. But on my credit report it is a red DF all the way to the end of the 5 years no money owed, though did miss couple of payments. Can you tell me if this is normal thanks.
Sara (Debt Camel) says
Hi Edward,
If you VTd your car over halfway through the payments, then you should not get a default for that. But if you had missed payments before and not made them up, that could be a valid reason for a default being added.
I think you should ask the finance company for a Subject Access Request (SAR) – this will give you a copy of your original HP contract and should show exactly when you missed payments and when you handed the car back. from there you will be in a better position to argue if the default is unfair.
Edward says
Ok thanks. Yes I missed a few payments but everything was up to date when I cancelled HP paying £1000 to settle missed payments which brought it back to rears. But on my report it’s RED DF all the way to the end of the original contract? At bottom of my report stated satisfied? Thank you
Edward says
I questioned it through noddle, and received a letter stating.. After investigation Lloyds RAN Assets Finance has advised that the disputed entry cannot be amended as per your request. Thanks Edward
Sara (Debt Camel) says
I think getting a SAR will make sure you have all the facts in front of you. At the moment you don’t.
Jemma Tonge says
Do not vt a pcp. I did 1 year ago and am now struggling to get finance for a new car.
Evon says
Hi when I exercise VT of a hire purchase car, do I get any money back for the market value of the car please?
Sara (Debt Camel) says
No. If you think you will do better by having to pay the full amount of the contract less te market value, than half the amount of the contract, then you shouldn’t VT. VTing is usually the better option – I suggest talking to National Debtline on 0808 808 4000 about the two alternatives.
steve says
i had a car on hp and gave it back after 6 month as the car was faulty and had been taken back on 3 other occasions to be repaired but came back each time faulty so i handed it back..they sold the car back to the garage i got it from the car cost .£3000 with them selling the car back to said garage and payments id made a total of £2819.25 and yet there still chancing me for another £1126.25 is this right?
Sara (Debt Camel) says
I think you need someone to look at the paperwork with you. Could you take the HP contract and the subsequent emails/letters to your local Citizens Advice? This may be a good reason to complain that you haven’t been treated fairly and the complaint should go to the Financial Ombudsman if the finance company rejects it.
Derek Holmes says
I have just submitted a Voluntary Termination letter to Advantage finance (HP on my range rover sport) This is their reply, Do I need to pay the £960.45 as they will get this and more from the sale of my vehicle at auction
“Dear Mr Holmes,
Further to your recent enquiry regarding the voluntary termination of your above numbered agreement, please find below important information outlining the required arrangements.
Upon termination of the above agreement you will need to pay:
1. The outstanding arrears on your account (applicable if already paid 50% of the total amount payable) = £0
2. At least one half of the total amount payable as stated on your Hire Purchase Agreement. This sum takes into account payments you have already paid, any deposit you paid at the start of the agreement and any arrears not shown in (1) above = £757.95
3. Any outstanding collection charges = £202.5
The total you will need to pay under this section is £960.45
Alternatively, we can arrange for the goods to be collected from your address. An upfront fee of £80.00 will be payable for this.
We look forward to hearing from you.
Yours sincerely,
Advantage Finance Ltd.”
Sara (Debt Camel) says
Yes you should have to pay the amount shown in (2) if you VT the car. By going for a VT you are limiting your liability to half the total cost of credit, but you don’t get any credit for the value of the car. This is often better for you than the dealer repossessing the car and selling it, see https://debtcamel.co.uk/vt-end-car-finance-early/. If you think you would be better off doing that, you need to check all the figures carefully.
I don’t know what the amount in (3) is. They are not allowed to charge you to collect the car if you VT it.
David says
Hi I have just vt my car and have not missed a payments will I still be liable for the interest on the car that I had for 2years o. A 4 year agreement
Weatherman says
Hi David
If you VT your agreement and have paid at least half the amount you originally agreed to pay over 4 years, that’s that. Nothing more is due.
For example, if your car was worth £10,000 and you agreed to repay a total of £16,000 (so £6,000 in interest) over 4 years, once you have paid £8,000 you can VT. If you’d only paid £3,000 of interest in that time, you wouldn’t owe the remaining £3,000.
Luke says
Hello
I’m looking to VT for a second time. I used to travel long motorway distances due to covid but now I am able to do my job remotely. I love my car but keeping the car an extra 3 years is not worth it as its a diesel and will only cause problems, I’m looking to get the same car but petrol which is better suited.
Will I struggle to get finance again? My wife and I are planning to have a child soon so having a car is essential.
My first car I financed I was offered 7k, my current car I was offered 17k, I have poor credit but have been building it up slowly. I have also since started renting my first apartment, will this have an effect on me obtaining finance?
Sara (Debt Camel) says
So you are less than half way through this contract?
Is it really worth the hassle just to change from petrol to diesel? Could you not also go for a cheaper car as you will be doing a lot less mileage?
17k is a lot if you have a poor credit rating.
Luke Betts says
Aswell as wanting petrol we also want a slightly newer and bigger car also as we’re expecting a child. We were offered 17k but we we only used £11,750. I am a big Volvo fan so I don’t want a cheaper car especially with a child as they are the safest cars in the world. We thought 17k was a lot, was this a one off do you think? Out credit cards are paid off in full now and we only use them for tiny purchases every few months so hopefully this will help? Out next car we worked out will cost roughly 10/13k so we wouldnt need 17k. We are doing the VT next march.
Sara (Debt Camel) says
what is your current credit score & with which credit reference agency?
why is your score poor and are you expecting it to improve soon?
Luke Betts says
Hello Sarah
My current score with Experian is 543 that’s up 10+ points from last month. I do not know what my score was when I took out my current finance, I assume it could have been lower.
In regards to why my score is so low. I lost my job and did the silly things like take out loans and credit cards to survive and being unable to repay. Those were dark days for me, this was over 4 years ago now. I have since got a good job on a very good wage. I have 2 credit cards which only use monthly a few times monthly for small purchases and I have direct debits set up to clear the balance each month.
I am doing my due-diligence as I’m a worrier. I know this will be my second time doing voluntary termination but it will be the last, I’m aware it does not hurt my credit score in any way but it will probably stop that specific lender from lending to me again.
I’m hoping my next car I will be able to get a lower APR on aswell. I will also be keeping the next one for the full 5 years, so we will be able to PX for a new one at the end of the contract.
I’m hoping the steps I’m taking will also improve my credit score over the next year when I come to applying for my new car.
Luke Betts says
Following on from my previous comment. The loans I took out are in repayment plans and I have been paying them for the last few years, I have not missed a payment for over 18 months with everything being paid on time. The balances are slowly coming down
Sara (Debt Camel) says
ok, so as defaults and missed payments get older, they count less against your credit score. Keeping up payments to defaulted accounts and payment arrangements won’t actually increase your credit score – but it does stop it getting worse if the creditor goes to court for a CCJ.
But if you are now renting and your partner is expecting a child, then it isn’t clear to me how affordable the new car finance will be. And you may find the finance companies are doing more checks than they did before.
I suggest you just carry on and see what your credit score is looking like early next year.
Luke Betts says
OK I see.
In regards to having a child, I worded that totally wrong, we are planning on trying for a baby at the end of the year so I’m hoping we will have the new car way before our child is born.
In regards to affordability we pay £330pm for our current car no issue with plenty of disposable income. Surely one of the things they will looking at when determining risk is they will see that I have had two finance deals previously and never missed a payment on either?
How much can I expect renting to realistically change the chances of obtaining finance?
I use Zuto, they are superb and then you make a finance application they will not actually do a hard search on your credit file until I accept the agreement.
Sara (Debt Camel) says
How much can I expect renting to realistically change the chances of obtaining finance?
I don’t think I can guess that!
Luke Betts says
Finally though, do you think two voluntary terminations and the fact I am renting now will reduce my chances? I have heard elsewhere is very very unlikey?
Sara (Debt Camel) says
I can’t guess. I have no idea how a car finance lender will assess your affordability.
Mandy says
I have paid just over 50% of my HP. Due to another year of paying £344 for another 2.5 years I’d be paying double what the car is worth.
I applied for a new car and got accepted with BM who I am currently with.
The dealership advised me that provision of the acceptance offer is that I have to end my current contract with them before they would give finance on my new car.
I did this on Friday and today (monday) I signed my new contract. Much better APR this time round.
On my way home from work I received a call to advise BM backed out.
I contacted Blue Motor and was told they couldn’t tell me why they’d changed there mind, but it was so to late for me to cancel the VT collection.
I’m now without a car, I work 40 miles away and I’m at a loss as to what I can do.
Please advise
Sara (Debt Camel) says
Buy another car?
You can look at the paperwork you signed and see if BM have the right to back out. You can ask them to explain why they did. You can complain the risk of the new finance not going through was not explained to you. You can say it was unreasonable to make you VT the car before. I can’t guess what the chance of any of these options working is…
But in practice looking elsewhere for a car may be simpler?
Louise says
Hi,
I have a pcp contract and have had it confirmed from the finance company that I have now paid 50% of total value so I can VT.
I have never missed a payment, I don’t have a mortgage but just have a credit card. My credit score is very good right now.
If I VT how will my credit score and future finance option be affected? And could it just be affected with car finance companies or any finance company? And if anything is put on my credit score about this VT, will that remain forever or for the duration of the rest of the contract (ie another 15months)? Or a specific period of time?
Many thanks for your help!
Sara (Debt Camel) says
As the article above says, VTing should not affect your credit score. But you may find it harder to get finance from the same company again.
David says
Hi, I bought a bmw in April 2022, October it broke down with major issues, it wasn’t covered in the warranty I was sold, I was told my bmw the issues presently fixed were present when I was sold the vehicle, also the vehicle was major over priced the car I have found out was only worth 9k, I was charged 14k which is a big mark up, the car has now broken again after paying hundreds of pounds to repair, I have had the car 11 months in a 5 year contract I want to vt the car as I’m afraid it will break down again and I feel I’ve been ripped off wiry this vehicle, the finance is 12k to settle they are saying the car is only worth 7.5k how much will I owe when I vt the car, I am also now in an IVA, they require I pay less for a car, 250 a month ok currently paying 316, can I vt the car?
Sara (Debt Camel) says
What was the total cost of credit on this finance? Thats the amount you borrowed plus the interest. It will have been on your paperwork. Also what was the interest rate
It is a condition of your IVA that you change this car for one costing £250 a month or less?
Callum says
Hello,
I’m just looking for advice on this – in a few short months I’m coming up to the halfway point of my HP car agreement. I was looking to part excahnge, but no dealer will give me the time of day due to the massive amount of negative equity I have in the car. Currently the value of the car is around £6-7k and I owe Oodle £15,700 ( this is down from the original £30k that the agreement started at. I’m currently paying £662 per month for the car and at this point just see it as money going down the drain for something that I don’t actually want. Please understand that I’m not currently struggling to maintain the monthly payments for the car, I just know that I can get something smaller and cheaper and be better of per month.
I have a fair credit score (Checking with Clearscore) of 657 with some outstanding debts, but my main concern is that I will not be able to get car finance if I go through with VT. I require this to earn a living as I don’t have the opportunity to work remote. During this time I will have some money to put down (4-5k) for a new car, however just really concerned that I will struggle to get new car finance.
Do you think I should go through with VT? as part exchange just isn’t an option at this point as I now understand how much of a bad agreement it was.
Sara (Debt Camel) says
It seems mad to pay £662 a month for a car that is worth so little.
I don’t know how much of a struggle it will be to get car finance, is this the first time you have VTd a car? You have a sizeable deposit so you should be able to get another HP.. Or look at a loan for 5 to 6k?
Callum says
It will be my first time VT’ing a car yes – I’ve looked at a few different forums as my understanding of VT to what it actually is, was totally different. The agreement itself started at 30k and the value of the car at the start of the agreement was 17k(ish) the main reason the agreement was so high is that I rolled over negative equity from previous cars into this as the car previous became was too expensive to run daily.
At the time, I just needed to get out of that car as it was making me struggle each month and fall behind with other Bills and ultimatley, no car is worth all of that hastle.
I have tried to get a loan, and have always been rejected, even previously when I’ve had a much higher credit score – I can only put it down to my credit history as I earn well above average. The main reason for my concern is that when I’ve read about VT, people only really go for that option because the car is unafordable / lifestyle has changed and well, although I can afford it and could likely see it out until the end of the agreement, it’ll mean thousands will be lost and can’t really find a clear answer for if you’re able to get car finance straight after a VT, only real answer I can find is that the broker I’m with (Oodle) won’t be too keen on having me back as a lender and some sort of mark gets put on my credit file, which doesnt impact it negativley.
Sara (Debt Camel) says
Obviously you do not want to borrow again from oodle!
What problems show on your credit record – any missed payments, payment arrangements?
Callum says
Ive never really had issues with car finance previously and have been with a multitude of lenders, but I agree that I dont think I want to start another agreement with Oodle any time soon.
And previously from 2021/2022 i have a default and missed payments from when I was made redundant unexpectadly so had to max credit cards I had etc to pay bills that I had month to month, since then, Ive got my utilization of most of my credit to under 30% on most things and havent missed a payment, its took a year near enough to get my score to where it is near enough.
Is it a common thing to do in that you VT and then get new car finance?
Sara (Debt Camel) says
I don’t know of any data to answer your question – that doesn’t mean few people manage to borrow, it could equally means that most succeed, Just there are no statistics.
But many people do VT a car because they cannot afford it, including people who in the cost of living crisis have decided they can manage with one fewer car in the household. Obviously they are then less likely to borrow again straight afterwards.
Lenders don’t want people to VT as it loses them money. Whether that means anyone would turn down an application for you for HP with a sizeable deposit and which would cost less than the £622 a month you have been spending is a different matter – lenders make their money by lending and why would they turn down a good customer?