Voluntary Termination (VT) – how to end your car finance early

When you are buying a car on finance you have the right to hand the car back and end the agreement. Depending on how much you have paid, you may not need to pay any more.

This is known as Voluntary Termination (VT). It applies if you have an HP or PCP finance agreement.

This article explains your rights and what you have to do to VT your car.

In 2020 and 2021, many people who have lost income because of coronavirus may be unable to pay their car finance. You can try to make an arrangement with your car finance lender. Payment breaks were going to end at the end of October, but if you haven’t had one so far, or you have only had 3 months, the regulator may decide to introduce further breaks in the next week or so.

If your problems are likely to last a long while or you simply don’t need the car, it is often much better to VT a car than have the lender repossess it.

The finance companies don’t like this – they would make more money if you kept paying them. They probably won’t suggest voluntary termination if you say you have money problems. Some may not be helpful when you tell them you want to hand back your car. And some may try to add extra charges on.

It may seem complicated but many people find it a straightforward procedure and don’t have problems.

Background

The types of legal agreements this applies to

Voluntary Termination applies to the following types of car finance:

• Hire Purchase (HP);
• Personal Contract Purchase (PCP) – this is a  type of HP where you have to make a large payment at the end to own the car. The same VT rules apply as for all other HP contracts.
• Conditional Sale – this is very similar to HP and the terms for VTing a car are exactly the same as for HP. Wherever you see HP in this article, the same applies to Conditional Sale contracts.

There is no right to VT your car if you are leasing it.

If you have borrowed the money from your bank, you may have a simple loan, not linked to your car. Here you own the car already and this article is not relevant for you. If you can’t afford the loan repayments, the bank cannot repossess it.

Three reasons why you may want to hand back your car

1. You can’t afford the repayments. It’s best to get advice on your debt options before you do this. Talk to National Debtline on 0808 808 4000 – they can help you look at your alternatives.
2. There may be a lot of negative equity in the car. This can often occur when the finance interest rate is very high. Sometimes the remaining interest you are paying may be more than the car is worth!
3. The car may no longer be suitable so you want a different one. I’ve looked at this situation in Can I get another car after VT or is part exchange better?

Whatever your reason for wanting to hand back the car, the procedure for doing it is the same.

Your right to terminate (VT) your contract

All HP contracts have the same provisions letting you terminate the agreement and hand back the car. Your rights are defined in Section 99 of the Consumer Credit Act 1974.

The agreement you received when you bought the car will have the following clause:

TERMINATION: YOUR RIGHTS
You have a right to end this Agreement. To do so, you should write to the person you make your repayments to. They will then be entitled to the return of the Goods and to half the amount payable under the agreement, that is [£x – the exact figure for your contract]. If you have already paid at least this amount plus any overdue instalments and have taken reasonable care of the goods, you will not have to pay any more.

Here is an example:

“Half the total amount payable under this agreement”

This £x is an important figure – find your finance contact and look up what it is. For the rest of this article, I will call this the 50% figure.

In a traditional HP contract, you pay the same amount every month for a set number of years. Here you will have paid the 50% figure after you have made half the monthly payments, or earlier if you paid a deposit.

In a PCP contract, the lump sum payable at the end is included in the total amount payable under this agreement.  As a result, you won’t have paid the 50% figure until you are a lot more than halfway through the contract.

Whether you end up owing money after VTing the car depends on how much you have paid already:

• you have paid less than the 50% figure   You can still VT your car. The termination clause does not say you have to have paid the £x before you terminate the agreement. When you VT the car you will owe the difference between what you have paid and the 50% figure.
• you have paid at least the 50% figure with no arrears  Here you can hand back the car and you will not owe any more money at all. If you have paid more then the 50% figure, you will not get any money back.
• you have paid more than the 50% figure and you have some arrears  You don’t have to pay the arrears before you terminate the agreement.  When you VT the car you will still owe the arrears.

“Have taken reasonable care”

If you haven’t “taken reasonable care” you may have to pay extra to cover the cost of repairing any damage.

Lenders lose money when you VT a car so they may want to try to get as much back as possible from you by sending threatening letters and invoices alleging paintwork damage or scuffs to alloy wheels. You can reduce the problems you may have if you photograph the car before you return it.

If the lender ends your contract it usually costs you more!

The 50% figure cap on the amount you have to pay means that VTing a contract can save you a lot of money.

If your car is repossessed by the lender, you normally have to pay the whole of the total amount payable under the contract, less whatever the car is sold for. And the car may be sold at auction for less than you would hope.

National Debtline has a comparison in the Example Agreement at the bottom of its Hire purchase and conditional sale factsheet. That shows how much less debt you may end up with if you VT a contract compared to when the lender ends the contract because you have arrears.

If you aren’t convinced VTing will be cheaper for you, talk to National Debtline who can help you look at your alternatives and what they will cost.

Important – you can’t VT your contract if it has already ended

You can only terminate your contract if it is still going. So if the finance company terminates your contract because of arrears, you lose the right to VT the contract and – as explained above – this may cost you a lot more money.

If you can’t avoid arrears on your car finance, you may need to decide whether to VT your contract before the lender terminates it.

Don’t panic and rush into a decision if you just miss one payment. A lender has to follow certain procedures to terminate your contract and they have to send you a Default Notice giving you the chance to pay the arrears. The National Debtline factsheet looks at what the lender has to do.

But think about taking some debt advice as soon as you know you have a problem. You may need to act very fast if you receive a Default Notice so it’s good to have thought about your options beforehand.

How to VT your contract

Tell the finance company

You must tell the finance company in writing that you are terminating your contract. National Debtline has a simple template letter you can use here.

(If you don’t tell them in writing, this will be treated as though you have “voluntarily surrendered” your car, not terminated the agreement. Then you will not get the protection of the 50% figure being the maximum you have to pay.)

Send that letter by recorded delivery to the finance company’s address – it is set out in your credit agreement. Keep a copy of the letter and the proof of postage. You can send a copy by email, but send the letter as well.

If you are asked to sign something by the lender, it is best to refuse to do this. If you talk to the lender on the phone, use the phrases “terminate my agreement” or “voluntary termination”. Do not agree if you are asked if you want to surrender the car or have it repossessed – these are not VTing your car.

Returning the car

The lender will give you details of how to return the car. You may be asked to deliver it somewhere – this should not be an unreasonable distance away – or they may pick it up from your home. You should not be asked to pay a charge for this.

Read the Legal Beagles Guide. That covers everything you need to hand over, including servicing history and keys, as well as the importance of taking a lot of photographs to show that the car is in reasonable condition.

Settling money still owing

After the car has gone back, the lender will either confirm that you don’t owe any more money or tell you how much you do owe. If you don’t think their calculation is fair, you should challenge it – see below.

If it is fair, you then have a debt to settle. You can make an offer of monthly payments. National Debtline’s budget tool will suggest what you can afford. You can send a copy of the budget to the lender. The lender can take you to court for a CCJ if you do not pay what is owed, but most lenders won’t do this if you have made a reasonable offer of monthly payments.

Problems that may occur

Many people don’t have any problems if they follow the above process to VT their car. But here are some things that can happen.

For all of the following problems, National Debtline and the Legal Beagles Vehicle Finance forum are great resources to explain what is happening, your rights, generally support you and suggest what you can do.

“Lender says I can’t terminate the contract”

The lender may say you can’t VT it because you haven’t paid 50% yet or because you have arrears. This isn’t correct. You have a statutory right to do this, your finance company can’t have more restrictive rules.

Go back to the lender and say that you are terminating your contract under Section 99 of the Consumer Credit Act (1974) and that section 99 and section 100 of the Act do not say that termination is conditional on your having paid half the total contract amount or on not having arrears.

The lender may immediately agree that you can VT the car – they were just trying it on in the hope that you would be put off.

If the lender still refuses, put in a formal written complaint to the lender. At the end of the complaint say that you will be taking the complaint to the Financial Ombudsman if it is not resolved. If you are unsure about what to write, talk to National Debtline

You can take your complaint to the Financial Ombudsman as soon it is rejected by the lender in writing or after 8 weeks if you have not had a response by then.

Making it difficult to return the car

Lenders may make it harder or more expensive for you to hand back the car eg by:

• adding charges;
• insisting you complete their documentation; or
• saying you have to deliver the car to somewhere that is not close

If this happens, take some advice on how to tackle this. You may find some of the Legal Beagles template letters useful.

Unreasonable charges for damage to the car

If you think the amount you are being asked to pay to repair damage is unreasonable, you should challenge it. You are should write to the lender, arguing in detail about your car and what “fair wear and tear” is. Read the the Legal Beagles guide and post on the Legal Beagles forum for help.

Excess mileage charges

PCP contracts contain a mileage clause, where you will have agreed to pay so much per mile over the annual mileage agreed. When you VT the car, the finance company usually says that you should pay the excess mileage charge for the time you have had the car.

This is a grey area. Excess mileage charges aren’t included in the 50% figure in your contract, so some legal experts don’t think you have to pay them if you terminate your car finance. But I have seen Financial Ombudsman decisions on excess mileage complaints where the Ombudsman said it is fair that excess mileage charges should be paid when you VT.

It’s up to you if you want to challenge an excess mileage charge. You will need to be determined. You may spend a long while exchanging letters with the car finance company and its solicitors. And you may need to be prepared to go to court.  You can get help on the Legal Beagles forum if you do want to challenge this.

But I want to keep my car!

In this case you don’t want to hand it back unless you have no other possible alternatives.

Read Were you sold a car on unaffordable finance? which looks at some of your other alternatives and take some debt advice.

If you have temporary problems because of Coronavirus, you can get 6 months of car finance deferrals and at the end of that you can ask your lender for other help, see Can you afford your car finance if your payment breaks have ended?

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