The most common reason for people handing back a vehicle that they’ve bought using a finance plan is simply because the monthly payments are no longer affordable.
If this feels like a familiar situation, it’s vital that you understand exactly what’s involved with handing a car back, whether or not you can do it, what the financial repercussions might be, and how to go about it.
We’ve put this guide together to explain where you stand if you’re planning on giving back a car on finance, whichever kind of agreement you’ve got.
Can you give back a car on finance?
There are generally four different types of car finance popular in the UK; hire purchase (HP) plans, personal contract purchases (PCP), personal contract hire (PCH) plans, and personal loans.
Since each is very different, it’s useful to look at what’s involved with returning a car early with each type of agreement:
If you’ve got a personal loan, your finance generally won’t be tied to the car – so you don’t need to worry about handing the car back. If you no longer want it, need it, or can afford to pay the repayments, you’ll just need to look at selling it, then settling the finance with the funds you receive.
Personal contract hire (PCH)
With a personal contract hire plan, you can generally hand the car back whenever you wish – although there will be an early hand-back fee to pay. You’ll need to talk to your lease company to have them work out what this is – and they’ll expect the car to be within its pro-rata mileage limits and in good condition.
As long as you meet these criteria and pay the penalty, ending a lease early shouldn’t have any impact on your credit rating.
Hire purchase (HP)
If you want to end an HP plan early, the law states that you must have repaid at least 50% of the total finance amount. Since HP has no ‘bubble’ or ‘balloon’ payment at the end, this will generally be around halfway through your repayment term.
So, what happens if you haven’t repaid half of your finance amount?
In cases like these, it can often make sense to pay off whatever amount will bring you up to this 50% mark. For example, if you’ve got a £20,000 overall finance amount (including fees and interest) to repay and your current payments take you up to £9,500 – you’ll be able to pay an additional £500 and hand the car back.
The way you’ll be ending your finance is known as ‘voluntary termination’ – and we’ll come on to the details of how this process works a little later.
Personal contract purchase (PCP)
Handing back a car that you’ve got on PCP is covered by the same law that covers an HP deal – although there’s one crucial difference.
As long as you’ve paid back 50% of the overall amount outstanding (again, including interest and fees) then you can hand the car back. However, it’s important to note that this overall amount includes the balloon payment at the end.
As such, even if you’re well over halfway through repaying your PCP deal, you might find you’re still some way short of the 50% you need to repay. Much like HP, it can often make sense to make the repaid amount up to this 50% to allow you to hand the car back – but since it’s often a significant amount of money, this sometimes needs additional finance to cover.
Remember, at the start of your PCP plan, you agreed to a certain mileage limit and to keep the car in good condition – so your finance company will expect you to have stuck to your end of the deal in this regard too. As long as all these boxes are ticked, you’ll be able to hand your car back.
What does voluntary termination mean?
So, ending your PCP or HP deal means you’ll be ‘voluntarily terminating’ your agreement – but what does this mean? And does it cause you credit score problems going forward?
The term ‘voluntary termination’ comes from Section 99 of the Consumer Credit Act 1974 – a part of the law that was created to protect people who could no longer afford to pay their monthly repayments. That said, the law is balanced – so it also prevents finance companies having to foot the cost if someone just walks away from their agreement at any time (i.e. before 50% is paid).
You are required to give your lender written notice of your intention to terminate the agreement – and it’s important that you do so, as simply not paying your finance can lead to the ‘voluntary surrender’ of your car – which is a very different process.
Under a voluntary surrender, the finance company will have your car recovered and then sold at auction. You’re likely to be charged heavily for the logistics involved with surrendering your car – and, if the car doesn’t sell for the full outstanding amount, you’ll be pursued for the outstanding balance.
While voluntary termination generally won’t have a negative impact on your credit score – voluntary surrender will, so it’s an option best avoided if at all possible.