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.