UK car loans: the little-known clause that means you can walk away from your deal | Car driving

IIf you’re one of the thousands of people across the UK who are struggling to meet their car finance repayments, are you aware that you can return your car and go debt-free once you’ve repaid half the amount owed?

Car finance payments are typically the second biggest household expense after mortgage costs, and the car industry is nervously waiting to see how many struggling with the cost of living default on loans, or use a little-known clause to voluntarily terminate the agreement.

In recent years, more than 90% of new car purchases and an increasing number of used cars have been bought on finance deals – in most cases through Personal Contract Purchase (PCP) plans that offered attractively low monthly payments.

The size and scope of the outstanding loans the British have taken out in recent years is nothing short of extraordinary. According to an analysis by the website Car Expert, they have been worth around £40 billion a year in total – up from £11 billion in 2009. The website says the average amount financed for each new car has more than doubled in the past decade to £25,000 plus. Second-hand car purchases are now almost as likely to involve a PCP agreement.

“The car industry has become completely dependent on people buying cars they don’t need for money they don’t have. The problem, of course, is that if people no longer have the means to borrow, the auto industry will collapse. It was a genuine concern during the Covid closures and remains a risk today as the cost of living spirals, says Stuart Masson, the site’s editor-in-chief.

Buyers were sold cars on the basis that monthly payments were low and affordable. However, to keep the car at the end of the three or four year period, a final ‘balloon payment’ (estimated future value of the vehicle) must be paid. This payment will depend on the car but can run into thousands of pounds.

Previously, buyers would simply trade in and sign up to another PCP, or return the car to the finance company, hoping that the actual value would pay off the loan.

But for those struggling to make it to the end of the loan term, or those who know their car’s value won’t cover the final balloon payment, there is another option, although car dealers rarely publicize it.

The driver's hand on the steering wheel
In recent years, over 90% of new car purchases and an increasing number of used cars have been purchased on finance agreements. Photo: microman6/Getty Images

The right to voluntary termination is enshrined in the Consumer Credit Act and allows the buyer to escape the agreement provided they have repaid 50% of the total amount due and the car is not damaged and in “reasonable” condition. This applies to used and new cars bought on finance.

Before people get too excited, they need to be aware that it is not 50% of the duration of the contract, nor 50% of what you originally borrowed, but half of the total amount owed, including interest.

Those on a PCP contract will usually not reach the voluntary termination point until late in the contract – usually the final months – due to the final balloon payment.

Buyers who used a lease will usually get there earlier, about halfway through the deal.

The total amount due and the termination amount must be shown on the car finance contract, so dig it out and check the numbers. Buyers cannot have missed any payments prior to the voluntary termination.

“The finance company is quite likely to lose money when you cancel your finance deal, so they’re not exactly going to go out of their way to help you,” says Masson, who has published a guide on how to do this.

“They may try to charge you for damages that would not be considered ‘reasonable care’ and will often use this clause as an excuse to try to stick you for excessive mileage. Usually this involves threatening letters and large invoices for minor scratches or excessive mileage. There will often be various forms and legal jargon to try and scare you into paying.”

Legal advice consumer forum LegalBeagles has some great advice on documenting your car’s condition with dated photos to prove it’s in ‘reasonable’ condition when you return it. It also has a template letter you can send to your finance company to start your voluntary resignation.

A voluntary termination will not affect your credit score or credit rating. However, some finance companies may refuse further financing applications from you, says Masson.

One last thing to be aware of is the big difference between voluntary resignation and voluntary surrender.

During a voluntary surrender made before the 50% limit is reached, you return the car but still owe what remains to be paid under the original contract. The finance company will sell the car at auction (adding extra costs to collect and dispose of the vehicle) and then pursue you for the difference.

The Finance and Leasing Association, the trade body that represents the companies, advises people who are struggling to pay off their car loan to speak to the lender as early as possible.

During the Covid pandemic, drivers were given paid holidays and lenders will want to talk to customers who are struggling to find a solution.

Leave a Reply

Your email address will not be published. Required fields are marked *