How To Get Out Of A Car Loan Contract

None of us know what the future holds, which is why entering into a car finance agreement, whether that is a Hire Purchase (HP) or Personal Contract Purchase (PCP) deal, is not to be taken lightly. Your circumstances in a few years or even months may be very different to how they are now.

You may have already considered this and came to a carefully considered conclusion that, based on your current and likely future situation, you can take out car finance without any concerns. In all probability you'll be able to see the contract through to the end without difficulty, too.

But what if you can't for some reason, be it through loss of employment or a change in your personal circumstances? Indeed, what if you find the car you've taken finance out on is no longer suitable - if you've unexpectedly had triplets, for instance, or suddenly need an automatic - what then?

The good news is that there are ways to terminate a car finance contract. Precisely how and what costs there might be depend on whether the agreement is PCP or HP, but in both cases you can expect to have to pay more the earlier you want to cancel the contract.

Be aware that if the car is on a Personal Contract Hire (PCH) lease, your rights are far more limited and it can be much harder to end the contract early - you will need to negotiate an agreement with the leasing company if you want to cut things short.

How to cancel a PCP finance contract

Depending on your reasons for cancelling a PCP contract, you have different options when looking to end it early. When weighing up those options, it's worth considering how this type of finance works. PCP finance splits the cost of a car into a deposit, a series of monthly payments and then at the end, an optional final payment - what the car is expected to be worth at the end of the contract - which you pay if you want to take ownership.

Let's say you finance a car costing £20,000. You might put down a £2,000 deposit and the car may be expected to be worth £10,000 at the end of the contract. That means that your monthly payments cover the difference between the initial £20,000 price and the £10,000 figure - minus the initial £2,000 deposit. So your monthly payments would equal £8,000 with a little interest added on top, all divided across the number of monthly payments.

With PCP you don't own the car unless you pay the deposit, all the monthly payments and then the optional final payment - until that point it belongs to the finance company. That's not a problem, since the appeal of PCP finance is that you get low monthly payments compared with the cash price of the car, with the option to buy it at the end of the contract, should you decide to.

What is Personal Contract Purchase?
What is Hire Purchase?

At the end of the contract it's up to you; you can choose to make the optional final payment to own the car, hand it back with nothing left to pay - assuming it's in good condition and you've stuck to the pre-agreed mileage limit - or 'trade it in' for another car.

That's how PCP works if you get to the end of the contract, but what about if you need to get out of the contract sooner? As cars lose value fastest when they're new, slowing as they get older, for most of the length of a car finance contract you're likely to be in what's referred to as 'negative equity' - this is when you owe more than the car is worth, so even if you handed the car back to the finance company, you'd still have to pay extra to settle the finance.

This is similarly true for Hire Purchase and PCP. The difference is, that as monthly payments for Hire Purchase are larger, you pay off the debt much quicker and get out of negative equity sooner - as by the end of a Hire Purchase contract you've paid off the whole car and you're then the owner. With PCP, though, there's still the large optional final payment at the end of the contract that you need to pay if you want to own the car.

As a result, with PCP you're in negative equity for much more of the contract. Only towards the end of the contract is there a likelihood of the car being worth more than the remaining finance balance - and even then, it's not guaranteed. All this being so, if you hit a tricky financial situation there are ways you can terminate a PCP or HP agreement. Keep reading to understand your options.

Speak to the finance company

If you think you're going to be unable to afford your car during the contract, let the lender know as soon as possible, so they can help you to get through this tough patch. Lenders like to be consulted early on if you think you will have problems making your payments, so they can look into the different repayment options.

Most companies don't like you terminating an agreement (explained below), so you can expect them to investigate ways to reduce your monthly payments to make them more affordable - potentially by spreading the loan over a longer period.

If you go for this option you'll pay more in interest than you would with the original contract, but the monthly amount may be easier to afford, which could make the difference between falling behind with payments and getting everything paid on time.

As falling behind with payments could make it much harder and more expensive to borrow money in future, it's worth doing everything you can to avoid getting into that situation. Whatever changes you agree with the finance company, make sure everything is confirmed in writing, so you know exactly what your responsibilities are and you have evidence of the new setup, should there be any form of disagreement.

Pay the settlement figure and sell the car

Another option is to contact the finance company and ask for a settlement figure - the amount you must pay them to end the agreement early and buy the car outright at any specific stage. The closer to the end of the agreement you are, the smaller this figure will be - as you'll have made more monthly payments - and vice versa.

Until the settlement figure is paid, the car is owned by the finance company, not you - even though it may be parked on your drive. You can pay the settlement figure yourself to take ownership, but if you need to get out of the car finance contract, chances are that you may not be in a position to do so.

AUDI A1 FINANCE DEALS

Part-exchange the car for a cheaper new one

There is another option, however; consider 'trading in' the car to a dealer and they can pay the settlement figure to buy the car from the finance company and then sell that car on. You can then purchase a cheaper car through the dealer - using negative equity finance - paying a lower amount per month for the new car, with a little extra added on top to pay off the remaining debt on the first car.

Get your sums right and this can cost you less overall per month than sticking with the first car, though be aware that you'll end up paying extra interest compared to continuing with the original contract. Also be aware, that the earlier you are in the original contract, the greater the amount of negative equity you're likely to have to pay off.

If in doubt, ask for a quote to find out how your new monthly payments - including anything needed to pay off any negative equity - would compare with your current ones. You should then be able to see whether this move will save you money or just end up with you paying more interest - something which would be a false economy.

Use Voluntarily Termination (VT) to end the agreement

If you're already most of the way through a PCP finance contract, you may be able to use Voluntary Termination to end the contract and hand the car back - with nothing else to pay. To be eligible to use this, you must have paid at least half of the 'total amount payable' - this means half of the total of the deposit, all the monthly payments, the optional final payment and any interest and fees charged. Be aware that this is a very different figure to simply half of the car's initial price.

This option makes most sense when you're close to the end of the finance agreement when there's less difference between what you owe and what the car is worth. Attempt to use VT before you've paid half of the balance and you'll have to make up the difference between what you've paid so far and half of the total amount payable, which could potentially be thousands of pounds.

Be warned: although it's your legal right to use VT and it shouldn't affect your credit score, finance companies frown upon it and may try to charge you damage and excess mileage penalties that in normal circumstances they may have waived.

VT is designed as protection for you should your financial circumstances change, not simply a tool to hand back a car early. As a result, if you've used VT numerous times, you may also find it hard to take out finance in future, as using it can cost finance companies money and they may see drivers who regularly use this option as a liability - a liability they may be less keen to lend to in future.

Use Voluntary Surrender to return the car

This is a last-ditch option should you have no choice but to give the car back and walk away without being able to pay any additional money owed and is very similar to having the car repossessed. You really should try to avoid taking this route since the finance company will pursue you for the outstanding debt plus costs - a bill that could run into thousands of pounds and involve all sorts of legal wranglings that could prove both stressful and expensive.

If you take this route, the lender will sell the car for as much as it can. If that amount is less than your remaining finance balance, you can expect them to chase you for it or to send a debt collection agency to retrieve this amount, if you haven't paid the amount owed by this stage.

Cancelling a Hire Purchase agreement

Hire Purchase splits the cost of a car into a deposit and a series of monthly payments. Make all of these payments and the car is yours to keep. Hire Purchase differs from PCP finance in that there is no large optional final payment at the end of the contract that you must make if you want to own the vehicle. This means that your monthly payments are higher, but also, once you've made the last payment you are the legal owner of the car.

Otherwise, it's similar to PCP finance in that you put down a deposit and then pay a series of monthly payments, with a little interest included in these. Also like PCP, the car is not yours until you've made all of the payments, so you can't just sell it - at least without the permission of the finance company, that is. Here are your options for cancelling a Hire Purchase agreement.

Speak to the finance company

As with any loan, if you're running into problems or think you're about to, speak to the finance company. It's in the company's interest to continue your contract to make sure that you can afford monthly payments and that the company gets all of its money back.

One of the most likely ways to do this is to extend the length of the contract, as this will reduce your monthly payments, hopefully making them more affordable. Take this option and you'll pay more in interest, but it could mean the difference between being able to make the payments and falling behind.

Pay the settlement figure and sell the car

You can ask the finance company to provide a settlement figure at any time. This is the amount due to pay off the finance and become the owner of the car. As with PCP, the outstanding interest figure will be recalculated, meaning you pay less in interest overall, as you're paying the balance off sooner than anticipated.

However, a difference compared with PCP is that as the monthly payments are bigger, you'll have paid off more of the value of the car to date with a Hire Purchase contract compared with an equivalent PCP one (assuming the same deposit and contract length). That means the settlement figure should be lower with Hire Purchase, with a greater difference the further you are into the contract.

Having received the settlement figure, you can pay it to become the owner or sell the car to a motor trader, for example, which would pay the remaining balance to the finance company. If selling the car to a dealer, make sure to speak to the finance company first, as it's not your car to sell. Provided the dealer pays the finance company directly, most companies should be happy with this arrangement.

The further you are through the contract with Hire Purchase, the greater likelihood there is of you having equity in the car - where it's worth more than the remaining finance balance. If you have equity you can either part-exchange the car (see below for details) or - with the agreement of the finance company - sell the car, with the extra amount over the remaining finance balance going into your pocket.

MERCEDES A-CLASS FINANCE DEALS

Part-exchange the car for a cheaper one

As you pay off the finance balance faster with Hire Purchase than PCP, you might find that there is only a small difference between the remaining finance balance and what the car is worth if you need to part exchange it ahead of time. If you're towards the end of the contract, it's likely that the car will be worth substantially more than the remaining debt.

If that's the case, the dealer can pay the settlement figure to the finance company and then the surplus - the equity - goes to you and you can then put this towards a deposit on a cheaper car to cut your monthly payments.

Voluntarily Terminate (VT) the agreement

As with PCP, you have the same right to terminate a Hire Purchase deal once you have repaid half the total amount payable (essentially half of the whole amount borrowed and any interest and fees added on top). Because you've been paying off the whole cost of the car, rather than just a portion of it with your monthly payments (as is the case with PCP), this point arrives much sooner - often around halfway into the contract. The larger the deposit you paid at the start, the earlier the halfway point will be.

If you choose to terminate before reaching the halfway point, you will have to pay any shortfall between what you've already paid and the halfway point. Bear in mind, however, that if you've paid more than half and want to hand the car back, you don't get any of this additional amount back - in theory this is the case even if you'd paid off 90% of the whole finance balance. Part-exchange the car, however, and it should be a different story.

Be warned: although it's your legal right to use VT and terminating in this way shouldn't affect your credit score, finance companies frown on it, as it costs them money and so they may be more keen to charge you damage charges and excess mileage penalties that in normal circumstances they may not have issued, simply to recoup some of the lost income.

Voluntarily Surrender the car

This is a last resort to be used only when your circumstances are so bad that you have no hope of repaying the lender as it involves handing the car back to the lender, potentially without making any further payments. Even though you're handing the car back, you can expect the lender to chase you for more money, as for much of the length of the contract you're in negative equity, with the car worth less than the remaining finance balance.

Making things worse, aside from being pursued for the remaining finance, it's likely extra fees and charges will be added on top, even if the lender sells the car for as much as possible. As a result, it's probable that one of the other options, such as part-exchanging the car or using Voluntary Termination would be a much wiser option.