Can I hand my lease car back early?If I wanted to end my lease contract early can I just hand the car back?
You can hand your lease car back and terminate your lease contract at any time. However, like with any financial contract, there will be a penalty for doing so. The penalty for terminating your lease contract early will depend on a number of factors. Primarily it will depend on how long is left on the lease contract. In this article, we’ll take you through the process for each lease type. We’ll also detail what financial penalties you could expect to pay.
Can I hand my lease car back early? | HP and PCP|
If you have a hire purchase lease and you want to hand the lease car back early then you can. This is known as a voluntary termination. Voluntary termination is the legal right of a borrower (you) to cancel your finance agreement early.
The right to voluntarily terminate your regulated Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement is provided in UK law (Consumer Credit Act 1974, Section 99) and should be included in your contract documentation. It exists to offer protection to consumers who can no longer afford their monthly payments. It equally provides some protection to finance companies. This is to ensure borrowers can’t simply walk away from their obligations at any time.
If some unforeseen circumstances have made it difficult to manage the payments on your car, then voluntary termination could be the right option for you. You can also pay off the entire loan early and keep the car but you may have to pay an early settlement fee.
How much will I have to pay?
The amount you have to pay will depend entirely on how long you have satisfied the contract for and the depreciation of the vehicle. A car loses the most value in the first year of being on the road. However, your payments are not higher in the first year of your contract. Your finance agreement spreads the depreciation out over time.
Example: Your lease contract was for three years and after one year you want to hand back your lease car. The penalty to pay will be larger than if you had satisfied two years of the contract. Depreciation of the car would have been calculated and built into your monthly repayments over a three year period. If you have only paid one year of depreciation then the finance company will lose money by reclaiming a car that has a lower value than your payments have covered.
The exact amount payable will be written in your contract. Make sure you have the remaining fee available to end your agreement.
How does voluntary termination work?
To qualify for voluntary termination, you need to pay 50% of the total amount payable including interest and fees. Then you can hand back the car with no further charges. The only exception is if the vehicle has not been properly maintained. Or if it has incurred damage above reasonable wear and tear. Finally, you may also be charged if you exceed your mileage allowance. PCP agreements mean that customers have the right to exit their agreement after half the total amount payable has been paid.
What do I need to do next?
Call your finance company and discuss your options. If you’re struggling to make your payments they may be able to offer you some assistance to avoid you having to terminate the contract early. If you still decide to progress with an early termination then notifying by phone in the first instance is best practice. Then, send a notice of termination letter to your vehicle finance company. If you’re not sure where to start, here’s a great template letter. Some finance companies will have an early termination form which you’ll need to complete before they will collect the vehicle. Make sure before you sign that you agree with everything listed in the clauses. You could end up paying additional fees that you weren’t expecting. The finance company will then contact you to arrange final payments and collection/inspection of the vehicle.
Will my credit score be affected?
A common question asked by people considering early termination is whether it will affect their credit score. I’m pleased to tell you that this will not affect your credit score because you are satisfying the agreement within your legal rights. The voluntary termination will be noted on your credit file, but this is nothing to worry about. There could be many reasons why the contract was terminated and no details are disclosed in the notes against this entry. In short, this will not affect your ability to claim future credit. The finance company providing you with the loan may not favour lending to you in future, but broadly speaking your ability to claim credit will not be affected.
However, If you have missed or late payments on your account this could affect your credit score.
If you have previously defaulted on your contract then your lease company can refuse your request to terminate the agreement early. The rules for voluntary termination are different if the finance company are trying to claim costs because of missed payments.
Will I need to pay an excess mileage fee?
If you satisfy the whole contract then excess mileage fees are payable if you go over your contracted mileage. Similarly, if you voluntarily terminate the contract before the end of the term and you have exceeded your pro-rata mileage allowance then there will be a fee to pay. This is because the value of a car is directly linked to its mileage and your finance company could lose even more money if the mileage is higher than what you have been paying to cover.
Can I terminate a business lease or contract hire agreement early?
An early termination is an option for contract hire vehicles but the costs are much higher than 50% of the total amount payable. Again, your contract paperwork will have details of the penalties.
If you have defaulted and are facing repossession of your car
If you have missed or have late payments on your finance account then the finance company could seek to repossess the car from you. Not only that, you will be charged for
- The remaining lease balance
- The past-due payments
- Amounts for excess wear-and-tear and mileage (if applicable)
- The costs of the repossession, and
- The costs of resale (such as cleaning), if the lessor decides to sell it after the repossession. (Once the lessor repossesses the car, it will usually sell it through a private sale or public auction.)
- The deficiency of the car on resale. This is when the finance company sells the vehicle but the sale price does not meet the amount needed to satisfy your lease. In this instance, you will be required to pay the difference.
In most cases, the finance company will send an invoice highlighting the deficiency amount for you to pay. If this remains unpaid then the finance company can direct the case to a third-party collection agency. Should a collection agency be instructed then the fees can soon mount up and become astronomical.
If you do not pay the deficiency then the finance company can file a court judgement. The court can order the money to be paid directly from your salary or seize your bank account. If you can, it is best to enter into a voluntary agreement with your finance company or opt for voluntary termination.
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