Ending a Car Finance Agreement Early (PCP / Lease / HP)
This is a question that a lot of people would like answered. Let’s get one thing clear from the off, I’m not a financial advisor nor am I qualified or authorised to give financial advice. This article is intended to share my knowledge and experience but you should ALWAYS carefully check the terms of your own finance agreement and speak to the provider to see how the land lies for you.
The law.
Under UK law, you have the right to cancel certain types of car finance agreements early.
Before you sign a car finance agreement.
READ IT!!! it’s as simple as that, read every words and make sure you understand it. Question anything you’re unsure about and if there is any doubt, ask for the responses in writing. Many people are so eager to get their new car, or perhaps feel pressured to sign something in a dealership, that they completely bypass this important step in the process. Remember that car finance agreements are not really designed to be ended early so it can be a costly business; there’s also a possibility that ending car finance early could harm your credit score. Always read the small print before you sign!
Buyer Beware
Your car salesperson usually has very difficult sales targets to meet and is earning much of their income from selling add-ons such as car finance.
However helpful they may seem you must understand that they don’t earn from saving you money.
Make sure you inspect and understand anything and everything you sign up to.
Why would you want to end your agreement early?
There can be several reasons for this, maybe you no longer want or need the car or perhaps a change in personal circumstances means you can no longer afford the payments.
Will ending a car finance agreement early affect my credit score?
Voluntary early termination of a finance agreement may well appear on your credit file but is unlikely to affect your credit score in an adverse way.
How does a PCP differ to Hire Purchase (HP)
Hire Purchase is relatively simple, you generally pay a deposit, then make monthly payments for say 2/3/4 years, and at the end of those payments the car is yours.
When you take out PCP car finance, you will generally pay a deposit and then borrow the rest of the money required to pay for the car. For example, if a car costs £20k and you put down a £5k deposit you are financing the remaining £15k. The finance company pays the dealer the £15k (plus commission) and you take your car.
You now owe the finance company the £15k in addition to any admin fees and, of course, the interest. This is now your debt and until it has been fully repaid the car belongs to the finance company.
Monthly repayments are then made (usually for 3 or 4 years) and then you will need to pay a balloon payment at the end if you choose to keep the car.
The finance company offers a guaranteed minimum value for the car to cover that final balloon payment means you can give the car back at the end of the agreement, or part-exchange it on another vehicle, instead of paying off the balloon
Can you end a PCP early?
You can usually end a PCP agreement early as long as you have paid 50% of the total finance amount back to the company, this would often include the cost of the finance (interest), any fees, AND the final balloon payment (as this is part of your debt).
You can generally opt to voluntarily terminate your agreement at any time, but if you haven’t reached your 50% point (i.e. haven’t yet paid off 50% of the total debt) then you will have to pay the difference to make it up. That may put you into a negative equity position and therefore may be no better than selling the car with the permission of the finance company and settling the full amount.
Remember that if you return your car and don’t opt to keep it, you may be liable to pay for any damage in the same way that you would with a lease.
Can you end a (PCH) car lease agreement early
You can end your car lease contract at any time by requesting what is known as an early termination.
Early termination charges are set by the finance provider and can be very steep, especially if you’re less than 50% of the way through your agreement. These fees vary on a case-by-case basis but paying back 50% of the remaining payments, once you get past the halfway point of your lease, is not unusual. There may also be an additional “fee” applied.
Can you end an HP car finance agreement early?
Yes, usually as long as you have paid 50% of the payments you can simply end the agreement and hand the car back. You will get no refund or benefit from any equity in the vehicle.
If you haven’t yet got to the halfway mark in your HP agreement, you can usually pay the difference (i.e. if you’re in month 15 of a 36 month agreement, the halfway point would be 18 months so you would likely need to pay 3 months payments to end exit the deal).
Should I settle my car finance early or keep it running until the end?
Remember that although car finance agreements can be broken, they are designed to run as you initially agreed, therefore breaking any kind of financial credit agreement is likely to cost you money so always carefully consider your options before doing so.
If you’re having trouble making payments.
The Financial Conduct Authority (FCA) has said finance providers (lenders) need to treat their customers fairly.
If you owe money on a mortgage, personal loan, overdraft or another form of credit (which car finance is!), your lender should:
work with you to provide support before you miss payments (where you tell your lender that you are struggling, or may struggle, to make payments)
consider a range of short and longer-term options to support you – this could include temporarily making no payments or reduced payments
give you time to repay what you owe and not pressurise you into repaying your debt within an unreasonably short period of time
direct you to debt help or money guidance, and liaise with a free-of-charge debt adviser when deciding what support may be appropriate
where appropriate, put in place an affordable repayment plan that considers your wider financial situation (including other debts and essential living expenses)
consider whether they should suspend, reduce or waive interest fees or charges
For more information visit this page on the FCA Website
In Summary.
Once again, this is not advice, it’s my unqualified opinion but I think the moral of the story is don’t sign up to anything that you don’t personally understand and make sure you read and fully understand any agreement that you’re entering into before you enter into it. If you do need an early exit from your finance agreement, do some research and understand your options whilst also trying to find out if your credit score will be affected should you end the agreement early.
Don’t be blinded by the thought of a new car and just sign what’s put in front of you, and don’t be lured into a false sense of security by a nice friendly salesperson who seems to have your best interests at heart.
Read, question, understand, and make a sensible and informed decision BEFORE you sign on the dotted line.
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