Car Finance Give Car Back - Financial Freedom

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Thinking about handing back your car before your finance agreement ends? It’s a decision that needs careful consideration, as it’s not always the most financially advantageous route. Here’s a rundown of scenarios and implications.

Voluntary Termination

If you have a Hire Purchase (HP) agreement, you have the legal right to voluntarily terminate the agreement under Section 99 of the Consumer Credit Act 1974. However, there’s a catch. You need to have paid at least 50% of the total amount payable, which includes the deposit, monthly payments, and any fees.

If you have paid 50%, you can return the car and owe nothing more. If you haven’t paid 50%, you’ll need to pay the difference to reach that threshold before you can hand the car back. Check your agreement to confirm the total amount payable.

Voluntary Surrender

Voluntary surrender is different from voluntary termination. It occurs when you can’t keep up with the payments and agree to return the car to the finance company. This will severely impact your credit score. The finance company will then sell the car, and if the sale price doesn’t cover the outstanding debt, you’ll be liable for the shortfall, including any associated costs like auction fees. This outstanding debt will also negatively affect your credit rating.

Personal Contract Purchase (PCP)

With PCP, you don’t automatically have the right to voluntary termination unless you’ve paid 50% of the total amount payable, just like HP. It’s crucial to understand that with PCP, a significant portion of the total amount payable is often tied to the Guaranteed Minimum Future Value (GMFV) or balloon payment at the end. Therefore, reaching the 50% threshold for voluntary termination with a PCP agreement can take longer than with HP. If you hand back a PCP car before paying 50%, the consequences are similar to voluntary surrender: a potentially damaged credit score and liability for any shortfall after the car is sold.

Alternatives to Handing the Car Back

Before making a decision, explore alternatives. Could you refinance the agreement to lower your monthly payments? Could you sell the car privately? Getting quotes for selling might reveal you can clear the finance and have some money left over. Talking to the finance company is also crucial. They might have options available, such as a payment holiday or restructured payment plan, depending on your circumstances.

Credit Score Implications

Regardless of whether you’re voluntarily terminating (after reaching 50% payment) or voluntarily surrendering, returning a financed car can affect your credit score. A voluntary termination after meeting the 50% threshold will have less of a negative impact than a voluntary surrender or early termination where you owe money. Always review your credit report after the process is complete to ensure accuracy.

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