How to Get out Of Car Finance
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Can I give my financed car back?
If you are struggling to meet your monthly payments to pay for your vehicle, there may be a solution.
Using UK legislation you can walk away from your car finance agreement and stop having to make monthly payments. We discuss everything you need to know about ending your agreement with a car finance provider, right here!
And if you want personalised advice and support, consider getting in touch with a UK debt charity.
What is a hire purchase agreement?
A hire purchase agreement, also known as a personal contract purchase (PCP – which includes a balloon payment at the end) or a personal contract hire (PCH), is an agreement with a finance company to buy a car over many months or years by making monthly payments. In the meantime, you are leasing the car from the lender.
It’s a bit like when you take out a mobile phone on contract, although with a mobile contract you also pay for extras such as minutes, texts and data.
The buyer of the car will usually pay the finance company or car dealership an upfront fee and then make monthly payments with interest to make up the difference. Unless a PCP is used as there is a balloon payment (larger payment) at the end.
Once the PCP or HP agreement is complete, the buyer will keep the car. Some people will use a credit broker to find a good car financing deal.
A legitimate car finance company must be authorised and regulated by the Financial Conduct Authority, and any car finance agreement must conform with the Consumer Credit Act 1974.
I have a car on finance and can’t afford it
Many people enter into a finance agreement to buy a car and then their financial situation changes for the worse, meaning they can no longer afford the payments in the PCP agreement.
If this is happening to you, you may be able to:
- Ask for a PCP agreement payment holiday while you get your finances back on track
- Look for debt solutions to avoid debts elsewhere
- Create an effective budget to cut unnecessary spending
- Look to exit the Hire Purchase (HP) agreement
Can you sell a car on finance?
You may be thinking about selling your vehicle which is still being paid off within a car finance agreement. However, this is illegal.
The finance company is the legal owner of the vehicle until all your payments have been made. Thus, if you sold it they could take legal action against you and you’ll be forced to pay them the money back.
And it doesn’t end there…
The person who you sold the vehicle to could take you to court to get the money they paid for the vehicle back. You may also have to pay their legal costs.
The bottom line? Don’t sell a car on finance.
This is also a word of warning to those looking to buy a second-hand car. Complete an HP check on the vehicle to ensure you are buying from someone who actually owns the car.
Can you go to jail for selling a car on finance?
The matter is a civil one and you will not be sent to prison for a custodial sentence unless you were found guilty of fraud.
Can you walk away from car finance?
Under the Consumer Credit Act, you may be able to return the car and walk away from your car financing agreement. This is one of two legal options instead of illegally selling a car on finance. The technical term for walking away from your agreement early is voluntary termination.
We explain how to voluntarily terminate an agreement with finance companies in more detail below!
How to get out of a car finance agreement
There are two ways to leave your car finance early:
- Voluntary termination
- Settlement agreement
1. Voluntary termination
Can I give my car back to the finance company?
Section 99 of the Consumer Credit Act enables anyone in the UK with a car finance agreement to terminate their agreement and give back the car. You won’t get back what you paid, and you may need to make a further payment when you terminate the agreement, as per Section 100.
If you have not paid back at least half of the value of the finance agreement – meaning the capital owed plus interest and fees applicable (such as an early exit fee) – you will be required to make a payment of up to half of its value to end the agreement early.
For example, if your monthly payments including interest are £200 and the agreement is meant to last four years (£200 x 12 months x 4 years = £9,600), you will need to have paid half (£4,800) to end the agreement early.
If you have already paid half, you might only be able to walk away if there is a clause that allows you to do so – or it might be advantageous to ask for a settlement figure and then sell the car after, maybe to buy a new car. More on this to follow.
Considering wear and tear
When you end the contract early and hand back the car, the lender must assume wear and tear will have occurred.
However, to voluntarily terminate your agreement costs these companies a lot of money, and they are known to try and recover as much money as possible. Sometimes you will be sent threatening letters and demands to pay for things that you were sure not there, such as scuffs and scratches.
To avoid being caught out, make sure you take photographs of all aspects of the vehicle before it is returned. You could use this as evidence if you ever get into a dispute about the condition of the car when it was returned.
Returning cars to a company
After voluntary termination has been finalised, all that is left to do is return the car back to the leasing company. This may occur in one of two ways:
- They ask you to drive it to a location
- They come and pick it up from your home
If they ask you to drop the car off, they cannot ask you to take it to somewhere of an unreasonable distance. You should be able to drive to the drop-off location in around 30 minutes.
And if they tell you they will come to collect it from your home, they cannot charge you any extra fees to do this. Coming to take back their vehicle is at their own cost.
Will voluntary termination affect your credit score?
A voluntary termination using the Consumer Credit Act may appear on your credit file, but it should not cause significant damage to your credit score.
How can I request a voluntary termination?
To request a voluntary termination from your finance company, it is best to put it in writing. We have created a free letter template to make this request to car finance companies. All you have to do is download our letter template, add some personal information and send it in the post to their registered office.
It will save you time and worry!
2. Settlement agreement
Can I settle my car finance agreement?
An alternative option is to ask the lender for a settlement figure to buy the car early.
The settlement figure will be an amount of money to pay off the agreement early and become the instant owner of the car. The total amount of the settlement figure should be lower than what is remaining on the original agreement, but you may have to pay early settlement fees.
Don’t forget that you may have agreed on a final balloon payment at the end of the contract. You would still need to pay this.
Paying to settle with the lender can be beneficial if you can afford to do so. You will immediately own the car and can sell it to recover some or all of the money.
What happens if my car is written off and it’s on finance?
When a car on finance is declared a write-off by the insurance company, it means the insurance provider believes paying for it to be fixed will cost more than it is worth.
The important thing to note here is that the insurance company is stating that the repairs will cost more than the current value for the car. They are not considering the fact that the car may have depreciated in value since the beginning of the contract. Or that you even have a contract to pay monthly and need to pay interest and fees.
Thus, the insurance company will pay you the amount required to fix it, which you could use to pay off the HP. It is likely the case that the insurance payout leaves you with negative equity in the vehicle.
You’ll still be required to make payments as per your finance contract. If you fail to make repayments, your credit score will be affected and you may struggle to get finance for a vehicle again in the future.
What can happen if you don’t pay car finance?
If you don’t keep to your monthly repayments, the lender must follow a process to request the money or an alternative payment arrangement. If you do not offer an acceptable proposal, they can take you to court. At court, you may be issued with an order asking you to pay the balance owed. You’ll also be told to honour the existing contract.
If you continue to not pay the debt balance or the remaining monthly payments, they may try to enforce the debt with an attachment of earnings (money is paid from your wages to the court), bailiffs (who may repossess your goods including the vehicle) or a charging order (the balance owed is paid from any property sale).
Consider debt solutions instead of getting out of car finance
If you want to escape your current financing deal to avoid debts elsewhere, you may want to consider some other options. You may be able to get out of debt elsewhere by using:
- Debt Relief Order
- Individual Voluntary Arrangement
- Debt Management Plan
For information on these solutions and other, head to our debt solutions hub.
Alternatively, you might be able to stick to the financing deal if you budgeted better. Read our budgeting guide for help in this area.
Complain about a car finance company
Any company providing finance to buy cars must be authorised and regulated by the Financial Conduct Authority. If you believe the total amount you are being asked to voluntarily end your contract is unfair, or to complain about anything other behaviours, you can lodge your complaint to the Financial Ombudsman Service.
Before you lodge your complaint, try and resolve the issue directly with the finance provider.
Can I sell a car after using a car loan?
If you took out a car loan to buy a car and the loan was not secured against the vehicle then you can sell the car whenever you please. You could use the money to pay off the remaining balance on your monthly loan repayments.
If you ask for a loan settlement figure, you may not have to pay the total amount of interest, but this will depend on specific circumstances.
You could make a full and final settlement offer yourself, which is explained in this post with a downloadable letter template to save you time.
To discuss your personal situation and HP issues, consider speaking with a trained debt advisor at one of the many UK debt charities. These people deal with all types of problems relating to the above topics and can give you confidential and personalised advice. Picking up the phone can make the difference. Find the right charity for your needs and preferences by reading about your options on our debt info page.