IIf you’re one of thousands of people across the UK who are struggling to make their car finance repayments, do you know that once you’ve paid off half of what you owe, you can return the vehicle and walk away debt free?
Auto financing payments are typically the second-largest household expense after mortgage costs, and the auto industry is nervously waiting to see how many people struggling with living expenses default on loans or use a little-known clause to voluntarily terminate their contract.
In recent years, more than 90% of new car purchases and an increasing number of used cars have been purchased on finance contracts – most often through Personal Contract Purchase (PCP) plans that offered attractive low monthly payments.
The size and scale of the outstanding borrowing that Brits have taken out in recent years is nothing short of extraordinary. They are worth a total of around £40bn a year, according to analysis by website Car Expert – up from £11bn in 2009. According to the website, the average amount financed for each new car has risen to more than £100 over the past decade doubled Over 25,000. Used car purchases are now nearly as common with a PCP contract.
“The auto industry is totally dependent on people buying cars they don’t need with money they don’t have. The problem, of course, is that when people run out of credit, the auto industry will collapse. This was a real concern during the Covid lockdown and remains a risk today as the cost of living skyrockets,” says Stuart Masson, the site’s editorial director.
Cars were sold to buyers on the basis that monthly payments were low and affordable. However, in order to keep the car at the end of the three or four-year term, a final “balloon payment” (the estimated future value of the vehicle) must be paid. This payment depends on the car but can run into thousands of pounds.
In the past, buyers would simply trade in and get another PCP or return the car to the finance company in the hope that its true value would repay the loan.
For those who are struggling to reach the end of the loan term or those who know that the value of their car will not cover the final balloon payment, there is another option, although car dealers rarely publish it.
The right to cancel voluntarily is enshrined in the Consumer Credit Act and allows the buyer to withdraw from the contract provided they have repaid 50% of the total amount and the car is undamaged and in a “reasonable” condition. It applies to used and new vehicles purchased on financing.
Before people get too excited, they need to realize that this is not 50% of the contract term or 50% of the amount originally borrowed, but half of the total amount owed including interest.
Those with a PCP contract usually don’t reach the voluntary termination point until late in the contract – usually in the last few months – because of the final balloon payment.
Buyers who have signed an installment purchase agreement usually get there earlier, around halfway through the contract term.
The total amount to be paid and cancellation fees need to be shown on the auto finance contract, so dig it out and check the numbers. Buyers must not have missed any payments until voluntary termination.
“The finance company is very likely to lose money if you cancel your finance contract, so they’re not exactly going to bother to help you,” says Masson, who published a guide on how to do this.
“They could try to charge you for damage that would not be considered ‘reasonable care’ and will often use this clause as an excuse to try to pin you down for excessive mileage. Usually these are threatening letters and large invoices for minor scratches or additional kilometers. There will often be various forms and legal jargon to try to intimidate you into paying.”
Consumer legal advice forum LegalBeagles offers some excellent advice on documenting the condition of your car with dated photos to prove it is in a ‘fair’ condition when it is returned. It also includes a sample letter that you can send to your finance company to begin your voluntary termination.
Voluntary termination will not affect your creditworthiness or creditworthiness. However, some finance companies may reject further funding requests from you, Masson says.
One last thing to be aware of is the big difference between voluntary termination and voluntary surrender.
If you voluntarily return before the 50% threshold is reached, you are returning the car, but you still owe the balance of the original contract. The finance company will auction the car (plus additional charges for collecting and disposing of the vehicle) and then track you for the difference.
The Finance & Leasing Association, the trade organization that represents the companies, advises people who are having trouble paying their car loan to speak to their lender as soon as possible.
Drivers have been granted payment holidays during the Covid pandemic and lenders will want to speak to struggling customers to find a solution.