Currently in the UK, nine out of ten new cars being bought are being purchased using car finance agreements.
In total, in 2019, £38 billion in car finance was provided to buy both new and used cars.
However, the car finance industry is one in which, it appears, some car finance providers are playing fast and loose with consumers’ rights and not always doing what is best for their customers.
This includes mis-advising consumers about their options when it comes to terminating car finance agreements.
So, can you Terminate a Car Finance Agreement?
Whether you can terminate your car finance agreement depends on what type of agreement you have.
Whether you should terminate your agreement, is another matter. There can be serious financial consequences of doing so, and if it goes wrong, you could leave yourself with substantial debts and a damaged credit rating.
So, what should you consider first?
If you are terminating your agreement because you are experiencing financial difficulties, you should speak to your lender first and ask if they can provide you with some breathing space.
This may be in the form of reduced payments, frozen interest, or even payment holidays.
However, even if your lender agrees to this, it will usually only be a short-term solution and they are likely to expect you to resume normal payments within a relatively short period of time and possibly make additional payments towards any arrears you have accrued.
Missing payments can also impact on your ability to borrow again, even if your lender agrees not to report them as missed payments to credit reference agencies, as other Lenders may still see you have not been making payments and still treat this as a red flag.
However, if your lender is not willing to show you any flexibility then there may be other legal solutions, such as applying for a Time Order under the Consumer Credit Act 1974, especially if your lender is taking you to Court. (Visit here for more information on Time Orders).
So, what Car Finance Agreements can I Terminate?
However, whether you can terminate your agreement, depends on what type of Car Finance agreement you have.
So, if you have a fixed sum loan, where you own the car, you cannot terminate the agreement. You will just have to repay the debt and if you can’t, seek advice. If you do stop paying your loan, however, your lender cannot just come and repossess your car. They would still need to take you to Court and instruct Sheriff Officers to Attach it.
However, where you have a Hire Purchase (HP), Conditional Sale or a Personal Contract Purchase (PCP) Plan, you can terminate your agreement by using two solutions, one of which is Voluntary Termination and the other is Voluntary Surrender. Both require you to return the car.
What is Voluntary Termination?
Voluntary Termination is a Statutory Right that everyone in a HP, Conditional Sale or PCP Agreement has. What this means is the right is contained in legislation and it does not matter what your agreement says.
What Voluntary Termination says is you can terminate the agreement and only pay half the full amount owed under the agreement, less what you have already paid, plus any arrears and any additional amounts for any damage to the car or excessive mileage (look at your agreement).
Case Study – Voluntary Termination
So, for example, using a recent case I advised on, the full amount owing under the car agreement was £28,000, so half of that was £14,000. The consumer had already paid £4,000 and had no arrears. The car was still in good condition. So, the full amount owed under Voluntary Termination was £28,000 divided by 2 (£14,000), less the £4,000 that had been paid. This meant £10,000.
The problem was, in this case, the car finance firm first claimed the consumer was not allowed to voluntarily terminate, as they had not paid half the amount owed under the agreement. However, this is wrong.
A Consumer is entitled under section 99 of the Consumer Credit Act 1974 to terminate the agreement at any point, even if they have paid less than half the full amount owed.
The second problem was the car finance firm claimed the amount owed, if the car was returned under Voluntarily Termination, was £12,000. This is because the Firm took the full amount owed under the agreement (£28,000), deducted what had been paid (£4,000) and halved the remaining balance (£24,000 divide by 2 = £12,000). This was wrong.
S100 of the Consumer Credit Act 1974 makes it clear when someone terminates an agreement using s99, their liability is limited to half the amount owed, less what they have paid, plus any extra added for arrears, damage to the car and excessive mileage.
What is Voluntary Surrender?
The next way a car finance agreement can be terminated is by Voluntary Surrender. This is different from Voluntary Termination, in that it is not a statutory right, which means the right is not contained in legislation. However, contrary to what many firms may tell you, neither is it a right that must be contained in the car finance agreement. It, therefore, is not a contractual right, either.
What Voluntary Surrender is, is an equitable remedy that has been developed by the Financial Ombudsman Service. It is based on the principle that Consumer Credit firms must treat their customers fairly and have a duty of care to provide them with the best option available when they are experiencing financial difficulties.
So, when Voluntary Surrender is used, the car is sold, and the proceeds of the sale are used to reduce the amount still outstanding under the agreement. This is the extent of your liability.
Now, usually Voluntary Termination is the better of the two options, because cars usually depreciate so quickly in value.
However, this is not always the case.
Case Study – Voluntary Surrender
So, using the example provided above, where the consumer took out a PCP Agreement for a car, where the full amount owed under the agreement was £28,000, the Consumer wanted to return the car after one year. They had already paid £4,000. Now if Voluntary Termination was done correctly, the Consumer would still be liable for £10,000. However, as the Car was still relatively new and in good condition, its value was estimated to be £19,000.
As the amount still owing under the agreement was £24,000, if the car were sold for £19,000, only £5,000 would be left to be paid.
That is half of what would have been owed under Voluntary Termination.
Now the problem is, the Car Finance Firm claimed Voluntary Surrender was not allowed as it was not in the contract. This was wrong.
So, What Does the Ombudsman say?
One way to resolve this question is to look at a case study that has been produced by the Financial Ombudsman Service’s.
In that case, a Consumer wanted to terminate her car, but the Car Finance firm did not tell her about Voluntary Surrender and only told her about Voluntary Termination. If she used Voluntary Termination (the only option they gave her), the lender said she still owed £10,000.
However, the Ombudsman found that as the Car was still relatively new and in good condition, if it were sold and the value deducted from what was owed. the lady would only have to pay £6,000.
This shows the Ombudsman takes the view lenders must provide the customers with the best option for them and treat them fairly.
Are Lenders Cherry Picking Solutions?
It does appear, however, that some Lenders are cherry picking the solutions they are offering their customers.
As explained, in the above case study, the Lender argued that Voluntary Surrender was not an option, as it was not in the customer’s agreement. However, in the above Ombudsman Case Study, he makes it clear that when it is in the customer’s best interests, the Lender should advise the customer on Voluntary Surrender.
However, in another Ombudsman decision, the Lender advised the Customer they had to use Voluntary Surrender, as they had not paid half the amount owed under the agreement, meaning Voluntary Termination was not available to them.
In his decision on this case, the Ombudsman found this was not the case and Voluntary Termination was not only available, but best for the customer. He said this:
There are two main ways a customer can end a hire purchase agreement before the end of the hire period – voluntary surrender and voluntary termination. Under voluntary surrender, the goods are returned and sold. The customer is then liable to pay any balance remaining after deduction of the net sale proceeds. It’s often used where the customer is having difficulty making payments, but it avoids the costs of repossession.
Voluntary termination is a right under section 99 of the Consumer Credit Act 1974, which says that a customer can end a hire purchase agreement at any time before the final repayment date. A customer who gives notice under section 99 is liable to pay no more than half of the total amount due under the agreement. If they have already paid that much, they cannot be asked to pay any more (unless, for example, charges for damage are due). It is commonly used where a customer no longer needs or wants the goods. These provisions of the Consumer Credit Act were reflected in the hire purchase agreement.
He also continued:
Section 99 of the Act says an agreement can be ended at any time before the final payment is due; that right is not conditional on a certain amount already having been paid.
When can you use not use Voluntary Termination?
One problem with Voluntary Termination, however, is you need to use it quickly if you are having financial difficulties. If you have been missing payments to your Agreement and the finance firm puts it into default, then they can terminate it, meaning the full amount owed becomes due. You may then also be liable for any legal costs associated with the repossession of your Vehicle.
The problem here is you cannot use S99 of the Consumer Credit Act 1974 to Voluntarily Terminate the Agreement, if the Lender has already terminated it. This means you cannot rely on s100 to limit your liability to the Lender.
In such a case you will then be liable for the full amount owed under the Agreement, less what the car sells for.
What if you are not happy with your Lenders treatment of you?
If you are not happy with a lender’s advice to you, or the options they provide, then raise a complaint with the Lender and explain why. They have up to 8 weeks to provide you with a final decision. If you are still not happy, then you can take your complaint to the Financial Ombudsman Service.