The downside of buying a motor on car finance is it can tie you in for three to four years, during which time life can change. You might lose your job and not be able to keep up the repayments. Or your family requirements could alter and you might need a different sort of car. Here’s how you get out of car finance early.

Act quickly

The Money Advice Service says you must get the ball rolling before you have to miss any repayments. And you should inform the finance company clearly about what you intend to do. Act promptly before you have to default on any payments and it won’t affect your credit score. Do this in writing over email or with a letter.

You can legally end car finance early

The law gives you the right to end a Personal Contract Purchase (PCP) or Hire Purchase (HP) finance agreement whenever you want. This is thanks to the Consumer Credit Act 1974 and you must apply for what’s called Voluntary Termination. For this to be financially expedient, you should check that the value of the car is less than the sum of the remaining payments. If it’s not, ask for a settlement figure (see below).

How to do it

To apply for Voluntary Termination you must pay or have paid at least 50 per cent of the total amount repayable. This is half of the sum of the amount you’ve borrowed plus interest and any fees. You can then simply hand the car back and walk away. But it must be in the condition stated by the terms of your deal. That probably means bodywork that’s not covered in dents or an interior that’s smeared with food. If you had an agreed mileage and you’ve exceeded it, the company may try to charge you a penalty. If you’ve taken reasonable care of the car, they can’t do this.

It shouldn’t affect your credit score either

If you’re in control of the Voluntary Termination you should be left owing nothing at the end of it. The lender should update your credit report and it may add that it was a Voluntary Termination. This shows other lenders that the finance was settled early and you didn’t default. Your credit history shouldn’t be damaged.

Be warned it’s not easy!

So far, so good. The spanner in the works is the dealer and its finance company partner won’t be overly keen on you doing a Voluntary Termination. They’ll view you as a lost customer and will be acquiring a car that may be worth less than the outstanding amount of finance. To cover your back and insure against any funny business, take dated photographs of the car before you hand it back so no one can claim you handed it back damaged. Include photographs of all paperwork in this.

Alternatively ask for a settlement figure

This applies to you if you’re buying a car using a Personal Contract Purchase (PCP). Ask the finance company for a settlement figure. This may be less than your remaining payments. Once you’ve paid the figure, the car will legally be yours to do what you want with.

Hire Purchase is a bit different

As with a PCP, write to the finance company to alert it to your intentions. Repaying HP early requires you to pay the outstanding capital of the sum you borrowed but not the interest. The fees you must pay are capped by law. These are explained by the Consumer Credit Act 1974. If you’re repaying less than £8000 early, there should be no extra fees. If you are charged extra fees for a larger sum, they should be the lowest of the following: 1 per cent of the amount repaid early; 0.5 per cent of the amount repaid early if there are fewer than 12 months remaining; the remaining interest.

Ending a Personal Contract Hire deal

Terminating a PCH agreement depends on the paperwork you’ve signed. You may have to pay off the leasing costs in full to get out of the deal early. If you’re struggling to pay the monthly costs, why not ask the leasing company if you can extend the lease period for lower monthly payments?