For many, voluntary termination can be the most appropriate way forward. What’s more, under UK law, it’s a legal right. That said, it’s also one of the most misunderstood parts of car finance.
At My Car Credit, we regularly hear plenty of questions around voluntary termination of car finance. From confusion around the rules, fears about credit score damage and uncertainty over whether it applies to PCP or HP agreements, we’ve seen it all.
This guide explains voluntary termination car finance clearly and honestly. You’ll learn how it works, when it’s a good idea, what responsibilities you have and how it compares to other ways of exiting car finance early.
So, whether you’re researching your options or actively considering ending your agreement, we’ll give you the clarity you need to make an informed decision.
What is voluntary termination of car finance?
Under UK law, voluntary termination is a legal right that allows you to end certain car finance agreements early and return the vehicle, provided specific conditions are met.
This is a result of the Consumer Credit Act, which gives borrowers protection when using regulated credit agreements (note that while this guide doesn’t provide legal advice, it explains the principle at a practical level).
Voluntary termination applies to regulated hire purchase (HP) and personal contract purchase (PCP) agreements.
Under these agreements, the car finance lender legally owns the car. You’re repaying the total cost of the vehicle (plus interest) over time.
Once all conditions of the finance agreement are met, you (the borrower) are allowed to return the vehicle. That’s if you’re in a PCP agreement. You can’t return the vehicle at the end of an HP contract.
With voluntary termination car finance, you’ve got the following options:
- Return the vehicle
- End the agreement
- Walk away once you’ve repaid 50% of the total amount payable
This right exists regardless of the car’s current value or market conditions.
How does voluntary termination work?
Voluntary termination car finance works according to the 50% rule.
This means that you can voluntarily terminate your car finance agreement once you have paid 50% of the total amount payable under the finance contract.
This figure is not just halfway through your monthly payments. It’s a specific number set out in your finance agreement.
Payments that count towards this 50% figure include your deposit, monthly finance repayments, any option-to-purchase fees (if relevant) and certain mandatory charges specified in the finance agreement.
Payments that typically do not count towards this 50% figure include your insurance, any servicing or maintenance plans, road tax, GAP insurance and penalty charges or late fees incurred.
If you’re looking for voluntary termination car finance, be mindful that the vehicle must be returned in an acceptable condition.
What’s more, if you’ve paid more than your 50% figure, you will not receive a refund. Alternatively, if you’ve paid less than 50%, you can still get early termination, but you’ll need to make up any shortfall.
Voluntary termination on PCP vs HP – what’s the difference?
Although voluntary termination applies to both PCP and HP agreements, it can work very differently in practice.
Voluntary termination on PCP
Voluntary termination is more complicated on PCP car finance agreements. This is because of the balloon payment (also known as Guaranteed Future Value).
Plus, because a large portion of the total amount payable with a PCP agreement is deferred to the end of the term, many drivers don’t reach 50% of this figure even when they’re halfway through the contract.
If you’re looking for voluntary termination on a PCP contract where you haven’t yet repaid 50% of the total amount payable, you can pay the difference as a lump sum. Once this figure is made back, you can voluntarily terminate.
Be aware that you won’t get a refund if you’ve already paid back more than 50% of the total amount payable.
Voluntary termination on HP
It’s typically simpler to secure voluntary termination on HP agreements.
Unlike PCP contracts, with HP, there’s no final balloon payment. As such, with your monthly HP repayments, each steadily reduces your total amount payable. Many drivers can therefore reach the critical 50% repayment threshold around the halfway point of an HP agreement.
As a result, with an HP agreement, it’s easier to calculate any remaining balance you owe to make up the 50% total amount payable on your contract.
Securing voluntary termination on an HP contract is therefore more straightforward than PCP.
How to voluntarily terminate your car finance agreement
Following a clear process makes securing early termination of your car finance much easier:
- Check your finance agreement – Confirm the total amount payable and any conditions around the vehicle’s return via voluntary termination in your contract.
- Calculate whether you’ve reached 50% – Add up your deposit and the monthly payments you’ve made so far, and compare this figure to 50% of the total amount payable.
- Contact the lender in writing – Notify the lender of your intention, clearly stating that you’re exercising your right to voluntary termination. Keep copies of any correspondence.
- Confirm vehicle condition requirements – Check your contract and liaise with your lender to establish what condition standards apply and how any damage is assessed.
- Arrange vehicle return – Follow the lender’s process carefully to coordinate vehicle collection or drop off, returning all keys and documents.
- Keep written confirmation – Request written confirmation of the agreement’s termination, and keep records for your own protection.
What condition does the car need to be in?
If you’re planning to voluntarily terminate your finance agreement, you don’t need to return the car in perfect condition. However, there are some fair wear and tear standards you’ll need to meet.
When it comes to fair wear and tear, normal tyre wear, light scratches, minor stone chips and interior wear consistent with the car’s age and mileage are generally considered acceptable.
If the vehicle has large dents, cracked windscreens, missing keys, warning lights and/or significant interior damage, however, you may face extra charges.
If you’ve exceeded standard mileage, you may also be subject to penalties.
Mileage is generally assessed when you return the vehicle. If you can stop (or reduce) unnecessary driving once you plan to terminate the car, this can help to keep a mileage figure down.
Does voluntary termination affect your credit score?
For drivers seeking voluntary termination car finance, questions around any potential damage to a credit score are amongst the biggest concerns.
Voluntary termination may appear on your credit file. But it’s not the same record as a loan default or missed payment. Voluntary termination is generally less damaging to your credit score than falling into arrears or repossession. As such, many people successfully obtain future finance agreements even if they have voluntary termination on their credit report.
One of the best ways to minimise the impact of voluntary termination on a credit report is by ensuring that you follow proper procedure.
Meet the 50% rule, return the vehicle in acceptable condition and follow the lender’s process correctly to avoid any negative effects.
When is voluntary termination a good idea?
If you’re facing long-term affordability issues because your circumstances have significantly changed, voluntary termination may be appropriate.
Alternatively, if the vehicle no longer suits your needs, or if keeping it will cause ongoing financial stress, early termination of your car finance can be suitable.
Be sure to check that you’re close to or past the 50% of your total amount payable (but remember you won’t be refunded anything you’ve repaid over the 50% figure).
When voluntary termination may not be the best option
On the other hand, if you’re very early in the agreement, or if the shortfall to reach that key 50% figure is too large, voluntary termination may not be the right decision for you.
It’s also not suitable if your car has excess damage or mileage.
If you’re experiencing affordability problems, consider whether the issues are short-term or solvable via other means than voluntary termination.
Alternatives to voluntary termination
There are alternatives to voluntary termination that you may want to consider before pulling the plug:
Early settlement – You’ll pay off any remaining finance, and can then choose to keep or sell the car. Be aware that early settlement can be expensive early in a finance agreement.
Refinancing – By refinancing, you could benefit from lower monthly payments and an extended term via a new agreement.
Part exchange – With part exchange, you use the value of your current car against the purchase of a new one. It’s a particularly good option for drivers with positive equity on their vehicle.
Downsizing – Switching to a cheaper vehicle can reduce your monthly finance costs, helping with overall affordability.
Payment restructuring – If you’re experiencing prolonged issues with making your repayments, you may be able to benefit from temporary support. This is lender-specific, however, and not guaranteed.
Why speak to My Car Credit?
If you’ve got questions around whether an early termination of car finance is most suitable for your circumstances, talk to us. We’ll help you come to a decision after exploring all available options responsibly.
If refinancing is most suitable for you, we offer soft-search refinancing checks. Alternatively, we can help drivers find more affordable replacement vehicles.
Our advice is transparent and FCA-regulated, so you can rest easy knowing we’re helping you make the right decision for your situation.
Voluntary termination car finance – summary
We’ve broken down everything there is to know about voluntary termination car finance.
As a reminder, voluntary termination is a legal right under UK law. It functions on the ‘50% rule’, allowing you to terminate your finance contract early once you’ve repaid 50% of the total amount payable on your agreement.
Voluntary termination is available for both PCP and HP agreements, but it’s simpler to secure on HP. Any voluntary termination is subject to specific wear and tear and mileage conditions and restrictions.
Voluntary termination isn’t always the best solution, and there are alternatives available. Understanding your options with voluntary termination is one of the best ways to put you in the driving seat of your finance journey.
If you’re unsure which route is right for you, speak to one of My Car Credit’s team today. We’ll offer responsible, transparent advice to help you find the most suitable path for your needs.
Voluntary termination car finance FAQs
What is the 50% rule in voluntary termination?
Under the 50% rule, you must repay 50% of the total amount payable under your finance agreement before you can voluntarily terminate. If you pay more than 50% and decide to voluntarily terminate your agreement, you won’t receive any refunds.
Can I voluntarily terminate my PCP early?
It’s possible to undergo early termination of PCP car finance but you may need to pay a shortfall. Be sure to confirm what 50% of your contract’s total amount payable is before deciding that early termination of PCP is most appropriate for you.
Can I voluntarily terminate HP car finance?
Voluntary termination of HP car finance agreements is often more straightforward than the same process via PCP agreements. You’ll still need to repay 50% of the total amount payable on your contract.
Will voluntary termination damage my credit score?
Voluntary termination may be recorded on your credit profile. However, it’s generally less damaging than more serious marks like arrears, and isn’t recorded in the same way as a default. Be sure to follow the proper procedure to minimise the impact of voluntary termination on your credit report.
Can I voluntarily terminate and then get another car on finance?
Provided you follow protocol for voluntary termination, it’s more than possible to secure another car on finance and, in fact, many drivers do.
Is voluntary termination better than early settlement?
The right decision for you will depend on your circumstances, equity position and affordability goals. Speak to My Car Credit’s expert team if you have questions about the most suitable course of action for your circumstances.
