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does voluntary termination affect your credit score?
does voluntary termination affect your credit score?

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Does Voluntary Termination Affect Your Credit Score?

It can be tempting to put off paying off the remaining payments on your car loan if you're having financial difficulties, but you should absolutely avoid doing this.
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People sometimes have to terminate their vehicle finance contracts early for a variety of reasons - this is referred to as voluntary termination.

Although it is your legal right, the procedure might be challenging, especially if it hasn't been properly explained. To help you understand what to do in these circumstances, we look at how voluntary termination works and how it affects your credit.

How does voluntary termination work?

Voluntary termination refers to your legal right, under the Consumer Credit Act of 1974, to end a vehicle credit agreement before the proposed terms. 

The minimum repayment amount is set at 50% of the initial contract value to make it work.

Both new and used cars with Personal Contract Purchase (PCP) and Hire Purchase (HP) financing are eligible for voluntary cancellation. However, the procedure varies slightly based on the kind of car financing you have.

What to do before you get voluntary termination

Getting ready is the most important thing you can do before a voluntary termination. It can often be a time-consuming process, and many lenders will require you to put in most of the effort to make it happen.

Keep in mind that it's best to take action as soon as you can because they can keep charging you until you have finished the process.

As soon as you know you are going to get a voluntary termination, you should stop driving that car immediately. In addition to your regular repayments, you will be responsible for any damages to the vehicle, which are typically characterised as 'wear and tear' and 'reasonable care'. 

This might range from charges of excessive mileage to marks on the bodywork.

Voluntary termination for PCP

You must have paid back at least half of the agreed-upon sum to terminate your PCP agreement early. Compared to other financing choices, PCP can make this step a little trickier because it typically doesn't happen in the middle of your payback plan.

The balloon payment is the reason for this.

The amount you must repay at the conclusion of the PCP contract is known as the balloon payment. The balloon payment is typically regarded as a benefit of PCP because it enables you to make smaller monthly payments.

You will, however, be required to pay more when you voluntarily end a PCP contract because you've been making lower monthly payments.

Voluntary termination for PCP

Because you often hit the 50% repayment milestone halfway through your agreement, terminating an HP deal voluntarily is much simpler.

If you haven't reached the 50% milestone yet, you can just pay down the remaining balance.

Does voluntary termination affect my credit score?

Your credit score will likely reflect the voluntary termination. However, it is unlikely to have a significant effect on your ability to secure car financing or get a car repair loan in the future as long as you pay your 50% repayment amount and any additional fees (for example, for wear and tear).

It can be tempting to put off paying off the remaining payments on your car loan if you're having financial difficulties, but you should absolutely avoid doing this.

Arrears result from unpaid debts and can lower your credit score, make it more difficult for you to secure car financing in the future, and raise your annual percentage rate (APR).

You must be certain that you can make your payments both now and in the future before accepting any car finance agreements. However, it may occasionally be necessary to terminate your vehicle credit agreement early for several factors.

Benefits of voluntary termination of your car finance

There are a few reasons why you may want to consider cancelling your finance agreement early:

  • If you are unemployed and won't be able to make your scheduled monthly payments.

  • If you want to get a new car with a new finance deal.

The simplest option is to cancel early if you need a new car for improved fuel economy, for example, but you still have a long time to wait for the vehicle credit agreement to finish.

These are some of the main reasons why customers would want to voluntarily end their car finance agreements. Although every circumstance is unique, there is always the potential that voluntary termination is the right choice for you.

Should I cancel my car finance agreement early?

You should carefully weigh up your options before you decide to end a car finance agreement early.

You may want to voluntarily terminate your agreement early if:

  • You can no longer make your car finance payments

  • You don't need your car any longer

Although in theory, you might use voluntary termination solely to get a new car, this is not what voluntary termination is meant for.

It is intended to assist those who are having financial difficulty by providing a means for them to end their car finance agreements early without paying any penalties.

Am I allowed to cancel my vehicle lease?

You should be aware that you might have to pay the entire balance due on your lease if you decide to end a personal leasing plan early and return the vehicle.

Before ending your plan, make sure to find out what this amount would be.

It's best to talk to your provider if you are having trouble making your monthly payments to see what they can do to help.

Can I cancel my car finance agreement within 14 days?

You have a cooling-off period of 14 days under the Consumer Credit Act whereby you can cancel a credit agreement. This is true for all types of car financing, regardless of how you applied—online, over the phone or in person.

Under UK law, when you accept the contract and sign it, the 14-day cooling-off period begins.

If you have a finance agreement for an amount of more than £60, 260, you won't be able to terminate it within the 14-day window because these agreements do not include a right to withdraw.

Alternatives to cancelling your car finance agreement earlier

Using voluntary termination might not be your only choice, depending on your circumstances. For example, you could:

Pay off your car finance early

If you can, pay off your car loan early. Although there might be an early payback fee involved, you could settle your debt in one large sum. 

After paying off your debt, you would have full ownership of the vehicle and be free to sell it if you want.

It can make more sense to pay off the remaining balance of your debt, particularly if you have already paid off much more than 50% of it. 

Remember that if you use voluntary termination, you won't receive a refund if you have paid more than 50% of the total amount.

Trade in your vehicle

You might be able to part-exchange your vehicle and use any remaining equity for a new contract if you want to upgrade your vehicle or transfer to a more affordable car financing option. 

The specifics of how this might work will vary depending on your finance company and how much equity you have in your car.

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