Can I end car finance early? And how do I get car finance with bad credit?

end car finance image showing two girls with a vauxhall

The downside of buying a motor on car finance is it can tie you in to repayments 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. You may even have been mis sold car finance and not be able to afford the repayments. Here’s how you end car finance early.

Act quickly to end car finance 

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).

end car finance

How to do end car finance

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 from the car finance agreement early. 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 is what you need to pay off car finance early. 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 hire purchase 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?

Our reader isn’t alone in having a bad credit history. But don’t give up hope. If you’ve been turned down by one finance company, it doesn’t mean they’re all going to refuse you the chance of buying a new car.

end car finance. Image showing inside of a renault dealer
It all looks so nice and shiny in the showroom. But sometimes you might have to end a car finance deal

How do I get car finance with bad credit?

The reason some finance companies turn down drivers with bad credit histories is that they’re not geared up to deal with people considered more likely to default on payments.

First off, try companies that advertise to drivers with bad credit histories. You’re more likely to be successful than with big name brands that are only interested in drivers with good credit scores.

It’s a bit like insurance: if you’ve been banned for drink driving and are looking for insurance, companies that advertise covering drivers who’ve lost their licence often have lower premiums than mass-market brands.

Find a friend without bad credit

Again, a bit like with insurance, having a friend you can make the application with can save you money. If your partner has a good credit score, apply for finance with them. Their good credit score will drag yours up.

Unfortunately, the opposite is also true. If the bad credit score holder causes a default on the payment, the person with the good credit history will be adversely affected.

Consider your credit score

The first thing a finance provider will do is look at your credit score. A simple way of improving yours is to use a credit card responsibly. That means buying things on credit and ensuring you pay the card off at the end of the month.

Experts advise people who want to improve a bad score to make small everyday payments on their credit card and then pay them off immediately. This shows lenders you can be trusted to behave sensibly.

Also consider paying regular bills by direct debit. Again, this shows you have a mature and conscientious attitude to money.

Become a proof reader

Not literally. Just make sure that your application form is filled out correctly. For example, is the address you’re using the one that’s on the electoral register for you? It should be. Equally, make sure you’re using the correct name if you’ve recently changed yours for whatever reason.

Do a spending and credit card audit

Look at how you live your life. If you’ve got maxed out credit cards and other outstanding debt, it makes you look like a bit of a liability. You appear as if you can’t support your lifestyle on your income. In turn, that makes a car finance provider wonder if you’re taking on too much to be sustainable.

One expert advises keeping credit cards at 25% below their limit. That shows you’re on top of your borrowing and less likely to default.

Don’t be in too much of a rush

If you get turned down for car finance by one company, carry out some of the steps above. It’ll take you a bit of time to get your house in order and that’s no bad thing. The longer you leave it between applications – we’re talking up to six months – the more likely you are to be successful.

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