Voluntary termination is a cheaper option than early settlement
There is one way to get out of a contract for free that your lender might not have told you about
At the end of October, the three-month motor finance repayment freeze, recommended by the Financial Conduct Authority (FCA) to help car buyers struggling with their finances during the pandemic, will be replaced by guidance that no longer includes this valuable break. Instead, from 1 November, the FCA expects finance companies to offer anyone facing repayment difficulties “a tailored package of support, taking into account the ongoing situation”.
The support the FCA recommends ranges from rescheduling payments or putting in place sustainable repayment arrangements to suspending or even cancelling interest payments. It’s generous, but should customers accept their lender’s help, the fact will be recorded on their credit file. While ensuring they only borrow responsibly, this could hamper a person’s ability to borrow money at reasonable interest rates and is a change from the guidance the FCA issued in April, which stated that lenders should ensure a borrower’s credit rating was unaffected by the help they received.
Combined with the end of the three-month repayment freeze for new applicants, it piles on the misery for people struggling with the economic consequences of the pandemic. Add the scaling back of the coronavirus job retention scheme and September’s rise in unemployment and redundancies and, for many people, now isn’t a great time to be paying for something as expensive as a car.
Already some are feeling the pain. Earlier this month, I visited my local Mazda dealer to have my car serviced. Without being prompted, a salesman told me he had experienced a rise in people coming to the showroom to discuss voluntarily terminating the finance agreement on their Mazda. Later the following week, a specialist in used electric cars told me the same story.
Often abbreviated to VT, voluntary termination allows borrowers to quit a PCP – and some other finance agreements regulated by the Consumer Credit Act 1979 – before it has run its course. To VT a car, a customer must pay or have 50% of the total amount payable under their finance agreement. Having done so, they can return the car to the finance company with nothing more to pay, save for any condition and mileage penalties due. VT shouldn’t be confused with early settlement, by the way, where the customer pays the total amount outstanding and then owns the car outright.
VT is a useful escape route but can be an expensive one. For example, my neighbour has a Volkswagen Golf 1.5 Match Edition Mk7 on a four-year PCP. She’s one year into the deal, but to VT it would cost her £6500 – the equivalent of a further 24 monthly repayments. It’s a lot of money, but it means that were she approaching the end of the agreement’s third year, she could VT the car with little or nothing to pay. Whenever it’s done, a VT is cheaper than taking the early settlement route (in my neighbour’s case, it would cost her £17,900).
Adrian Dally, head of motor finance at the Finance and Leasing Association, expects VTs to increase after 31 October. “Things have turned out significantly better than we predicted at the start of the pandemic, thanks to the fact that up to 700,000 customers have taken advantage of payment deferrals,” he says. “However, we’d be naïve to think everyone will resume their repayments where they left off. We expect some to voluntarily terminate their agreements.”
Sara Williams, a debt advisor who runs debtcamel.co.uk, a debt news and advice website, agrees. She says that for many people VT will be their best option: “It looks likely that no new payment breaks will be set up after October. Redundancies are rising, too. For anyone affected, the choice may be between terminating their PCP or paying the rent or mortgage. For many people, it may be the sensible choice.”
The way voluntary termination works is set out in sections 99 and 100 of the Consumer Credit Act 1974. It’s a good protection for consumers that doesn’t affect the borrower’s credit record – but only if they know of its existence. Unfortunately, some finance agreements neglect to mention it. For example, the finance paperwork relating to my neighbour’s Golf makes no mention of her right to VT her agreement. Presumably, omissions such as this are why the FCA reminds finance companies they “should act in a way that is clear, fair and not misleading”.
Ian Ferguson, a former dealer group boss who two years ago crossed the forecourt to become a consumer champion helping people to reject their car through his rejectmycar.com website, knows how opaque, misleading and downright unfair dealers and finance companies can be when people try to VT their car.
He says the problem starts with the culture of car dealers in which people are promoted purely on their ability to sell cars. It continues with a finance industry that rewards them to obstruct customers – and penalise them if they foul up.
“Some manufacturer-owned finance companies, as well as major banks, pay dealers a bonus of around £1000 on each finance agreement that can be clawed back if it’s terminated,” he says. “This penalty exists for the length of the agreement. It’s therefore in the interests of dealers to at best discourage customers from voluntarily terminating their cars and at worst tell them it can’t be done.”
Another tactic finance companies use to discourage VTs is to threaten customers with excessive bills for wear and tear. Ferguson claims that when his son, who he says is fastidious about looking after his cars, VT’d his Citroën, the finance company told him he owed £750 for damage. Ferguson asked for photographic evidence and says he was sent what turned out to be images of another car. He argued the company down to £57, which it insisted was for a new tyre, even though the car had been serviced and checked by a main dealer the week before it was returned and its tyres judged to be well within limits. “I took the finance company to the FCA and won £250 compensation,” says Ferguson.
Given his experience, it would appear that there is yet one more thing to be wary of during these difficult times.
How to VT your car
If you’re struggling to meet the repayments, speak to the finance company to discuss how, following the FCA’s guidance, they can help. If they can’t and you consider VT to be your best option:
■ Write to the finance company telling them that you wish to voluntarily terminate your agreement under section 99 of the Consumer Credit Act 1974. Send the letter by recorded delivery. Don’t allow the finance company to misinterpret your request and assume you wish to surrender the car, in which case you will have to pay the full settlement figure.
■ Take photographs of the car, its odometer reading, its service history, its spare tyre and toolkit and both sets of keys. You will need them as evidence should there be a dispute. The finance company can’t expect the car to be like new, so argue against any charges that you think are unreasonable.
■ If you’re asked to return the car, it must be within a reasonable distance. If the finance company collects it, they can’t charge you.
■ If you can’t resolve any issues with the finance company, appeal to the Financial Ombudsman Service (0800 023 4567).
READ MORE
Top leasing deals: BMWs and Range Rovers for less than a PCP
Source: Autocar
