What to Do When You Need to Cancel Car Finance Early

Paying for a car by cash is less and less common in the UK these days. Once you've chosen the new car that you want, it's usually time to sign up for a finance agreement with monthly repayments. However, many owners might question whether it's possible to cancel this agreement before it's completed. Take a look at this guide and find out all you need to know about early cancellation of car finance.

By Gumtree Editorial Team

21 June 2021 8 min read

What to do when you need to cancel car finance early

Decide why you want to cancel your finance agreement early

A finance agreement for a car is likely to be one of the biggest financial commitments you’ve made, and there are lots of reasons why you might want to cancel your deal early.

You no longer need the car. This could be the case, for example, if you end up getting a new job that provides you with a work vehicle, or you decide to share with a relative or partner. You could even get a car as a gift or a prize, or maybe you’ve just decided that you prefer other forms of transport.
You want to buy or lease a different car. It’s possible that you’ll just change your mind about what kind of car you like to drive, or you might decide that a different model will better suit your needs.
You can no longer afford to pay. All kinds of unexpected events and circumstances could mean that you’re no longer able to make your monthly payments on a finance agreement. You might also just have a change in priorities and decide that it’s not possible for you to keep paying the amount that was agreed upon.

How to cancel a personal contract purchase (PCP) agreement

A personal contract purchase (PCP) agreement is one of the most popular ways of buying a car. It involves putting down a deposit first and then paying for the car in monthly instalments. Buyers have a lot of flexibility in terms of how long they want these instalments to keep going. At the end of the agreement, you decide if you want to buy the car outright for one final ‘balloon’ payment or just hand it back. You also have the option of using the car as part equity towards payment for a different car.
You have the right to cancel a PCP agreement at any point. Known as voluntary termination, this right is a legally binding initiative under the Consumer Credit Act 1974. It applies under the following conditions:

You’ve paid at least 50% of the agreed amount for the car. The stage at which you’ve paid off more than half of the car’s price will usually be over halfway through your planned payment term, when more than half of the instalments have been paid, as it includes the final balloon payment. If you’re not at this stage yet, you’ll be required to pay the remainder upfront before you can cancel the agreement.
You’ve taken good care of the car. When you signed up for the finance agreement, you’ll have been given detailed information about what kind of things count as acceptable wear and tear. As long as you’re within these guidelines, you shouldn’t have a problem cancelling your PCP. It’s a good idea to take dated photographs of the car when you buy it and when you hand it back to protect yourself against damage charges.

If you meet the above criteria, get in touch with the lender to discuss cancelling the agreement and what this entails. There should also be an explanation of the early termination process in the agreement’s paperwork.

How to cancel a hire purchase (HP) agreement

Hire purchase (HP) is another popular way of paying for a car. It’s essentially a secured loan, tied to your car, a bit like how your mortgage is tied to your house. After you’ve paid an initial deposit, all you need to do is pay for the car in monthly instalments, and it’s yours once they’re all paid. Unlike a PCP, there’s no balloon fee that has to be paid at the end.

Cancelling an HP is very similar to cancelling a PCP, with the lack of a balloon fee being the main difference. This means that you’ll probably have paid 50% of the agreed amount of the car when you’re halfway through your payment term. Again, if you’re not at this stage yet, you’ll need to make up the difference in order to cancel the agreement.

What to do if you can’t afford to pay

If you’re in a car finance agreement and you find yourself really strapped for cash, it’s not the end of the world. If you haven’t yet paid off half of the amount you agreed, and you’re not in a position to make up the difference, then you can end the deal using what’s called ‘voluntary surrender’. This means that the car is handed back, but you’ll still owe the rest of the price.

Usually, the finance company will auction off the car, and the amount that they raise will go towards paying off your debt. If this isn’t enough to cover it, you’re still liable, and they’ll pursue you to pay back what you owe. This could involve debt collectors or legal action, as well as extra costs incurred for admin and disposing of the vehicle.

Will early cancellation affect my credit rating?

Backing out of a car finance plan before the agreed date could be recorded as part of your credit history. However, the voluntary termination shouldn’t have any impact on your credit score, and you’re unlikely to have any problems getting a different finance agreement in the future.

If you do fail to keep up with payments and find yourself unable to pay off what you owe, voluntary surrender of the vehicle will likely affect your credit rating negatively.

As you’ve seen in this guide, picking out a car is just the start of the journey towards ownership for a lot of buyers. Car finance options are a great way to help you out on the way, and they tend to have plenty of flexibility, which is ideal if you ever have a change of heart or a change of circumstances. Just make sure that you’ll be able to pay the majority of what you’re agreeing to pay, and you shouldn’t encounter too many difficulties in getting the car of your dreams.

For more helpful advice, take a look at our guide on how to sell a car with outstanding finance.

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