Reading through the terms and conditions of a new car deal can generate a lot of questions. And, to avoid issues, it’s important to get the answers to each. Particularly, as a case in point, if one of them is ‘What is voluntary termination?’
Voluntary termination is the phrase coined for ending your car finance agreement earlier than the contracted end date. Drivers have a legal right to end their car finance agreements early under the Consumer Credit Act of 1974, provided they meet certain criteria.
Voluntary surrender is something else that we’ll also cover here. But, for now, let’s focus on what voluntary termination of a car finance agreement is.
Why you might file for voluntary termination
The main reasons for filing for voluntary termination of a finance agreement are related to affordability or a change of circumstance. If you can no longer afford to keep up the monthly payments, or the car no longer suits your needs, you can end your contract early.
Effectively, although there are criteria that need to be met, it gives you the option to end the contract early and return the car. Even if the reason is simply that you want to change it for a different one. Best of all, the process is possible without any additional charges, or any negative effects on your credit rating.
How voluntary termination works
Voluntary termination can be used to end Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements. To be eligible, you need to have already paid or be willing to pay 50% of the value of the contract. If so, you can terminate the agreement and no longer be liable for the cost of the car, once you’ve returned it.
The risks of voluntary termination
The downsides vary depending on how much of the contract value you’ve paid off, what condition it’s in and whether you’ve gone over the mileage limit. It’s advisable to periodically take timestamped photos of the car to prove its condition and mitigate against any damage claims the finance company attempts to make.
The wording of the contract is deliberately vague, so you might find yourself with additional fees to pay if you don’t protect yourself. If you’ve exceeded the mileage limit, all you can do is pay the charge.
If the car’s residual value is greater than the remaining payments, you could better off paying the settlement figure and selling it on, rather than entering voluntary termination. Though you obviously need the funds to do so, which may not be an option for everyone.
You can check the value of the car using a valuation service, including the Parkers car valuation page.
How long does it take?
The voluntary termination process should be pretty quick. But finance companies aren’t overly keen on you enacting voluntary termination, so it really depends on your own circumstances and how quickly the finance company deals with the process.
You can make the process quicker by being clear when you ask for voluntary termination. Before starting the process you should:
- Ensure you’ve met the requirements – i.e. you’ve paid 50% or more of the agreement off already and your car has no wear and tear issues.
⠀ - Stipulate you wish to enact ‘Voluntary Termination’ and don’t interchange this with ‘Voluntary Surrender’ – see below for more on this.
Early termination of leasing
The rules are different for other types of car finance agreements. Handing back a car you’ve leased – also known as Personal Contract Hire, or PCH – early can be much more difficult and costly, as these agreements are designed not to be broken and do not offer the flexibility built into PCP contracts.
Whether early termination is available on a PCH contract is down to the lender and there could be additional issues if you’ve fallen behind with payments. Some lenders might insist that you still owe the full value of outstanding payments – whether you hand the car back or not – while others might charge you half the remaining monthly payments, plus any arrears.
Bear in mind that handing a lease car back early could result in you being carless and still liable for a substantial amount in monthly payments, penalties and fees. Should you find yourself stuck with a lease car you can’t afford – or one that simply no longer meets your needs – there are a few options.
First off, talk to the leasing company to see if you can refinance or lengthen the contract to drop the monthly payments to an affordable level. Secondly, ask whether there’s any way you can return the car or swap it with minimal fees.
What is voluntary surrender?
Voluntary surrender isn’t the same as voluntary termination, so don’t confuse the two. Voluntary surrender is when you give the car back but still owe money to the supplying company. For example, you might not have paid off 50% of the total amount payable – the minimum required for voluntary termination – or you might not be able to do so, meaning you still owe the finance company that money.
Using voluntary surrender, you hand the car back and the finance company sells it on. You then owe the finance company the difference between the sale price and the amount you owed.
If you interchange the terminology when you make a request to end the contract, unscrupulous finance companies have been known to seize on the word ‘surrender’ and process a request for voluntary surrender. Not only does this leave you liable for the whole amount owed, but it’ll also negatively affect your credit score.
While voluntary surrender it is more favourable than repossession – since you control some things, such as the time of day you hand the vehicle back – you should only consider voluntary surrender if there is literally no other way to work it out.
The Financial Ombudsman Service says lenders can be hesitant to offer this, but you’re well within your rights as a consumer to ask for it. Just don’t get it confused with voluntary termination.
