You may have heard of people handing cars back to finance companies, or doing what is called a Voluntary Termination. This is where you are able to return the vehicle to the company that financed the car and not make any further payments. Yes it does exist, yes it is legal, and no, it does not really damage your credit report if you do it, but there are some rules to follow.
To explain how this all came about, a bit of background is required. Hire Purchase agreements, sometimes referred to as HP, or Conditional Sale agreements, are the adult version of the child they came from many years ago. Originally the Hire Purchase agreement fundamentally meant that you hired an item, such as a washing machine, over a set period of time, and it was agreed that if you made all the payments on time for the agreed period, then you would own the item.
When the Consumer Credit Act 1974 was introduced, it set out some rules to protect consumers and lenders, and to establish a more mature set of rules for everyone to follow. The problem is, if you agreed to Hire Purchase an item for 36 months, but could not make the last payment, the hire agreement contract had been broken and the customer, or debtor, would have to return the item to the creditor as effectively they had not paid that months hire payment. This also meant that the other 35 payments, paid in good faith, with the intention of owning the item, were effectively lost. The act brought in rules commonly known as halves and thirds, and it is the halves that we’ll be going through here, and why they allow you to return a vehicle to the lender.
If you add up what you paid originally, plus any interest and charges, and then divide this number by two, you get the half point. All Hire Purchase documents will have this on so the calculation is done for you. If the payments you have made so far in the agreement, including the deposit, equal this figure or more, you are past half point.
Basically, the rules set out by the Consumer Credit Act suggest that when you have paid half, you own more of the goods and agreement than the creditor, and therefore you have more control and options than you did when the creditor had a controlling share. Because the agreement is a ‘Hire to Purchase’ agreement if you like, if you have paid more than half you can choose to cease the hire part of the agreement, and return the goods to the creditor. You are allowed to do it, it is legal, and in some circumstances it is exactly what you should do.
If you look at your document it will have a highlighted box that says words very similar to this.
TERMINATION, YOUR RIGHTS – You have the right to end this agreement. To do so you should write to the person you make your payments to. They will then be entitled to the return of the goods and to half the total amount payable that is £xxxx.xx. If you have already paid at least this amount, plus any overdue instalments, and have taken reasonable care of the goods, you will not have to pay any more, please refer to condition x for full terms and conditions.
So, if you have paid half, yes you can terminate the agreement and the lender will usually come and collect the car. Even if you haven’t paid half, you can still terminate so long as you can pay the difference between what you have already paid and half point.
Things to Check Before You Terminate
- Note the clause reasonable care. This usually means no major damage to the vehicle inside, outside, or mechanically, but it does allow for wear and tear such as small paint scuffs and minor tears in the seats etc. It also means you should have a valid MOT, have serviced the car, and it being in an acceptably clean condition.
- You can only terminate regulated Hire Purchase type agreements, which are agreements with a loan under £60,000 pre Feb 2012, and under €75,000 Euro post Feb 2012, which is just over £62,000. Also, agreements to limited companies are unregulated and do not count, so most commercial vehicles are not covered. Personal Loans, Motor Loans, Bill of Sale agreements, and most lease type agreements are also unregulated, but PCP (Personal Contract Plans) and Balloon Hire Purchase agreements usually are regulated, but may come with mileage restrictions. You need to be under the allowed mileage on these type of agreements, if there is a mileage allowance, or you may have to pay a few pence for each mile you are over the allowance.
There is really only one situation that should mean a termination is the right thing to do. Assuming you can on the clauses noted above, it really only makes sense to terminate if the amount you owe is in excess of the value of the car. If the car is worth more than you owe, it make more sense to simply sell the car, settle the finance, and pocket the difference. If the vehicle is worth less, then by terminating the agreement and giving the car back in almost all cases means you effectively wipe the debt without having to pay any extra, and you can start again with a new car.
Many people worry about whether it has a negative effect on your credit report, like it would if you had the car repossessed. The short answer is no. When you are repossessed you are in breach of the agreement. If you stop paying, or are late paying, you are in breach of the agreement. Voluntary Termination is different, you are allowed to stop hiring the vehicle should you wish to, it is your right to do so under the terms of the agreement, and you are very much allowed to do it. A lender can note on your file that you did terminate the vehicle, but equally also has to mark the agreement settled in full on your credit file. If you do it many times then you may find that in future the lender considering your application would want a higher deposit to mitigate the risk of exposure to the same issue again, but it is certainly not a black mark, or something that is going to ruin your credit history.
Termination is a key part of Hire Purchase, and the basic rules are the same for everyone, so if you have been told that you have negative equity, which is where you owe more on the car than it is worth, or you simply do not want to own the car anymore and cease paying, you can. Each lender has very slightly different terms on what to do, so get out your old documents, read in detail what they say, and if you meet the criteria then it may make a lot of sense, and save you thousands of pounds in some circumstances, to action your right to Voluntary Terminate your current agreement.