Due to the COVID-19 outbreak, many consumers have opted to take a car finance payment holiday or cancel their car finance agreement. But how easy is it to cancel your agreement and for what reasons would you want to? What you can do can depend on which type of car finance agreement you have and also how much of your agreement you have paid off. Let’s take a look at the easiest way to cancel your car finance agreement.
What are your rights to cancel?
There are two main types of car finance agreement which slightly differ in your rights to cancel. However, section 99 of the Consumer Credit Act 1974, allows you to cancel your agreement under “voluntary termination”. This means you have a right to bring your Hire Purchase and Personal Contract Purchase to an end early. This law was set in place to protect people who have taken out a finance agreement but can no longer afford to meet the repayment schedule.
Why would you need to cancel your car finance agreement?
There are a number of reasons why people may want to cancel their car finance agreement. For example, it might be that you:
- Can no longer afford to meet the repayment schedule
- Have had your car stolen
- No longer need the car anymore
- Want to get finance on another car
How to cancel a Hire Purchase agreement?
A Hire Purchase car finance agreement is a form of car finance that helps you spread the cost of owning a car into affordable monthly payments with added interest. Monthly payments tend to be higher than other options as the cost of the car is spread out. If you find yourself unable to meet your repayment deadline, you can usually easily cancel your agreement.
If you are over 50% of the way through your agreed term, you can cancel your agreement through voluntary termination. As long as you have made all your payments on time and in full and are halfway through your agreement, you can hand your car back to the dealer or finance company and walk away from the agreement.
If you aren’t halfway through your agreement, it may be worth waiting a little while longer if you can. If not, you will have to pay the difference up to 50% and then cancel the agreement. Alternatively, you could consider refinancing a car loan instead. This can reduce your monthly payments and reduce interest rates too.
How to cancel a Personal Contract Purchase early?
Personal Contract Purchase (PCP) is a type of car finance that tends to be most popular in the UK. You will usually pay a deposit and then monthly payments till the end of your agreed term with added interest. Monthly payments tend to be lower than Hire Purchase because you are paying off the most part of the car. Unlike Hire Purchase, you have three options at the end of the agreement, you can hand the car back to the dealer, you can pay the balloon payment and keep the car or use the resale value of the car on another car.
Like Hire Purchase deals, you can cancel your car finance agreement after halfway through the agreement. However, you won’t of necessarily paid off over 50% of the agreement and you will need to take the balloon payment into account. Your final amount to pay will include the balloon payment, fees for mileage and damage, and also interest fees. The balloon payment is usually quite sizeable so you may need to wait longer before you choose to terminate your agreement. At the start of your agreement, you will also agree to keep the car in good condition and also within a mileage limit, if not this can affect your chances of taking the car back and getting a new car.
If you have not reached the 50% mark of your agreement, you will need to pay the difference before you can end the agreement early.
Will cancelling my car finance affect my credit score?
It may appear on your credit file if you have applied for voluntary termination. However, it should not have any effect on your credit score. If you are looking into canceling your car finance agreement, you should speak to your finance lender first. If you fail to meet your repayment schedule you can fall into arrears and negatively impact your credit score. This can affect your chances of getting a car on finance in the future.
Interesting Related Article: “A Guide to a PCP Car Finance“