Does voluntary termination affect my credit score?
Looking to get rid of your car and switch to a flexible car subscription?
The decision to voluntarily terminate your car finance doesn't have an impact on your credit if it's done right. So you may be in an excellent position to remove the burden of your long-term car contract.
And you're not alone! According to research by GOV.UK, about 11% of car finance contracts in 2018 were terminated early voluntarily.
So let's get to it...
What is voluntary termination?
Voluntary termination is when a borrower returns a vehicle to the lender before the loan is fully paid off.
According to the Consumer Credit Act 1974, consumers have the legal right to terminate a car finance agreement, such as a personal contract purchase or a hire purchase, before its completion.
This right is protected under statute and can not be restricted or eliminated by car finance companies within the terms and conditions of any agreement.
However, it is essential to note that this right can only be exercised if certain conditions are met.
How does it work?
A car finance agreement may be ended early as long as certain conditions are met. One such condition is that the car must be returned in good condition, with no excessive damage beyond normal wear and tear.
In case of voluntary termination, you will be responsible for paying half of the Total Amount Payable as set out in your contract. This amount includes the borrowed amount plus interest. And in some cases, it may also include the price of Guaranteed Future Value.
However, this amount doesn’t include any late payment fees or arrears that may have accumulated. So, as long as the car is returned in good condition and you pay back 50% of the Total Amount Payable, there should be nothing left for you to pay.
Note that voluntary termination is not the same as voluntary repossession. With the latter, you return the car but still have to pay the money owed according to the original finance agreement.
Remember that you essentially end the agreement once you've covered 50% of what you owe and not when you're halfway through the agreement (e.g. two years into a four-year contract). The calculation is based on the amount you owe and not time.
Voluntary termination and your credit score
If you're worried about your credit score, don't be. A voluntary termination won't affect your score at all.
One myth about voluntary termination is that it will harm your credit rating and leave a negative mark on your credit history. This is not true.
You're exercising your right to end a legal agreement without incurring adverse consequences.
You can still get loans if you need them and even get a car loan again if you need one!
Any termination of a finance agreement will be noted on your credit record, whether voluntary or involuntary. So, to potential lenders, ending your car finance early won't make a difference.
Want to learn more about the perks of car subscription? Read our in-depth guides for more information:
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