How to get out of car finance: every way out, and which one fits

You want out of a car finance deal: the car doesn’t suit you any more, it’s faulty, or the payments have become too much. You have more ways out than most people think, and the right one depends on how long you’ve had the deal, what type of finance it is and what the car is worth against what you owe. On hire purchase or PCP, the most important number is the halfway point: once you’ve paid half the total, you can hand the car back and owe nothing more.

Which way out fits your situation

In the first 14 days: the cooling-off period

The Consumer Credit Act gives you 14 days after signing to withdraw from a regulated finance agreement, without giving a reason. You tell the lender in writing, then repay the amount borrowed plus interest for the days you had it, within 30 days.

The catch is that withdrawing cancels the finance, not the car purchase. On hire purchase or PCP that usually means you have to pay for the car yourself. It suits people who have found cheaper borrowing, not people who no longer want the car. You can return the car itself in that time only if it’s faulty, or if you bought it online or away from the dealer’s premises, where separate 14-day cancellation rules apply.

If the car is faulty

Under the Consumer Rights Act 2015 a car must be of satisfactory quality, fit for purpose and as described. If it isn’t:

• Within 30 days you can reject it for a full refund.
• Within six months you can ask for a repair or replacement. If that fails, you can reject it, with a deduction for the use you’ve had.
• On hire purchase or PCP the finance company supplied the car, so you make the claim to the lender, not the dealer. Rejecting the car ends the finance agreement too.

Put the complaint in writing and keep evidence, such as a garage report. If the lender says no, you can take it to the Financial Ombudsman Service for free.

Once you’ve paid half: voluntary termination

On hire purchase and PCP you have a legal right to hand the car back once you’ve paid half the total amount payable, including the deposit, fees and any balloon payment, as long as you’ve taken reasonable care of it. You then owe nothing more.

Take a £20,000 car with a £2,000 deposit on hire purchase at 9.9% APR over four years. The total amount payable is £23,697, so the halfway point is £11,849. With payments of £452 a month, you reach it after about 22 payments. Before then, you can still hand the car back by paying up to the halfway point. On PCP the large balloon payment counts in the total, so the halfway point comes later. The full guide is voluntary termination.

Selling, part-exchanging or settling early

You can’t sell a car on hire purchase or PCP while there is money owing, because the lender owns it. But you can ask the lender for a settlement figure, which is what you’d pay to clear the deal today, and sell or part-exchange the car to cover it. Dealers do this every day.

On the example above, after two years the settlement figure would be about £9,996, against £10,849 of payments left, a saving of about £853. If the car is worth more than the settlement figure, selling puts the difference in your pocket. If it’s worth less, voluntary termination may cost you less. See paying off car finance early.

If you can’t afford the payments

• Talk to the lender before you miss a payment. FCA rules say it must treat you fairly if you’re in difficulty, and it can agree a payment plan, a short break or reduced payments.
• Know the one-third rule. Once you’ve paid a third of the total on hire purchase or PCP (£7,899 in the example, about 14 payments in), the car becomes “protected goods” and the lender needs a court order to take it back.
• Avoid voluntary surrender if voluntary termination is open to you. Surrender means the car is sold, often at auction, and you still owe the shortfall.
• Get free advice from StepChange, National Debtline or Citizens Advice, especially if car finance is one of several debts.

Don’t simply stop paying. Missed payments go on your credit file, and the lender can end the agreement and ask for the full balance.

At the end of a PCP

At the end of a PCP you have three choices: hand the car back and pay nothing more (subject to mileage and condition), pay the balloon and keep it, or part-exchange it. If the car is worth more than the balloon, that equity can go towards your next car. See the PCP balloon payment.

Leases and personal loans

• Personal contract hire (a lease): you never own the car and there is no right to voluntary termination. Ending early means paying an early termination charge, which is often a large share of the payments left. Ask for a quote in writing.
• A personal loan: the car is yours, so you can sell it whenever you like and use the money to repay the loan. You have a right to settle the loan early with a reduction in interest. See car loan vs car finance.

Your credit file

Settling early, selling the car or using voluntary termination are normal ways to end an agreement and usually show as settled. Missed payments, defaults and voluntary surrender with a shortfall are the ones that hurt. That’s why it pays to choose a way out before the payments start slipping.

To find your total amount payable, and so your halfway point, use the car finance calculator. Your lender will give you an exact settlement figure on request.