What if I can no longer afford my car lease?

The car finance market has exploded in recent years, with financial experts expressing concern that this type of borrowing could end up being the next ‘debt bubble.’ Figures show that 86% of all new car registrations are bought with some form of credit, with experts even predicting that within 10 years, all cars will be purchased with the assistance of a finance company.

What is the issue with car finance agreements?

The problem is that personal contract purchase (PCP) and hire purchase (HP) car financing agreements require little in the way of an initial deposit, and can be easily obtained by consumers posing a high risk of default. If you do fall behind on your monthly payments you are at a high risk of having the car repossessed – that is taken back by the finance company leaving you without a vehicle. Depending on your situation this could cause a catalogue of problems such as not being able to get into work, or struggling to get the kids to school in the morning.

If you are having trouble keeping up with the monthly repayments, you may be considering your options for returning the car voluntarily, perhaps so you can purchase something smaller and cheaper instead. So if you have a car lease agreement that has become unaffordable, what are your rights to cancel your obligations under the lease? Section 99 of the Consumer Credit Act, 1974, states that, under certain conditions, you have a right to voluntarily end your regulated car lease, whether it’s a PCP or an HP agreement.

The PCP or HP lease agreement should set out your rights in relation to early termination if you can no longer afford your repayments. Cancelling a car lease in this way helps to prevent further decline into debt, removing what is often a significant monthly outgoing.

If you’ve already repaid at least than 50% of your Personal Contract Purchase (PCP) or Hire Purchase (HP) finance you are within your rights to return the car voluntarily with no penalties. This is known as a Voluntary Termination agreement. The key here is that 50% of the total finance amount (which is not necessarily the value of the car) has been repaid.

For example if you have taken out £30,000 worth of finance for the car, and you have made payments in excess of £15,000, then you are able to cancel the agreement and hand the car back without financial charges being levied.

If you have financed the purchase of the car through a personal contract hire (PCH) agreement, then the rules are different, and unfortunately you will find it more difficult to simply hand the car back if your lease still has several months or years left to run. Although you do have the right to return the car if you no longer want or need it, this will typically not be allowed without you having to pay back all of the money you still owe. This means that if you have 18 months to run on the contract, you will be asked to make a payment equal to 18 months’ worth of payments. Clearly this is not a desirable outcome as not only will you still have to pay everything you owe, you will also be left without the car. If you are in this position your best course of action is to contact the finance company directly and try to negotiate an arrangement which works for both parties, however, brace yourself for having to pay a significant closing fee.

Alternatively, if you are keen to keep hold of the car but would like to be rid of the monthly payments, you may be able to pay a lump sum amount to buy the car outright and end the lease early. You will need to contact your car finance provider directly and ask for a settlement figure. Depending on the exact terms of your contract, you may be liable to pay an early repayment charge for terminating your lease in this way. Also, this option is only viable if you have the ability to make a one-off payment. You should think extremely carefully before taking out another form of finance to raise money to pay off your lease; you may find yourself simply kicking the problem along the line rather than solving it.

Ending your car lease agreement

There are two aspects to consider when terminating a car lease early:

Repayment of 50% of the Total Amount Payable (the calculation for this varies according to the type of lease)
Ensuring there is no damage to the vehicle apart from the expected wear and tear, and that you haven’t exceeded the agreed mileage rate

The Total Amount Payable should be clearly stated on your contract. It’s the amount you borrowed, plus interest and charges. If you’ve taken out a PCP, an additional figure is included in the Total Amount Payable – the Guaranteed Minimum Future Value (GMFV).

What is the process for cancelling a car lease?

If you decide to cancel your car lease rather than negotiate for lower repayments, the first thing to do is contact the lender. You may prefer to phone initially to let them know your intention, following this up with a notice of termination letter as confirmation.

Some lenders require you to sign their own early termination document. It’s vital to check what you’re signing for, however, as you could incur unexpected additional charges. Once you’re satisfied that all is in order, the lender will inspect the car and take it away.

Be warned that if you’ve already defaulted on your repayments, it’s unlikely that you’ll be able to voluntarily end your car lease, however, and the finance company is under no obligation to allow you to do this, therefore taking action at the first sign of financial trouble is highly recommended.

Other considerations when ending a car lease early

Your credit score

If you’re able to cancel your lease agreement early, you can give the car back to the finance company and it won’t affect your credit score. While this is good news, you should be aware that it’s unlikely that you’ll be able to borrow from this particular lender as they will have lost money on the deal. The fact that you’ve used voluntary termination is noted in your credit file, but the reasons why the lease was ended are not.

Excess miles

When you take out car finance, certain types of lease place a limit on the number of miles you can travel in the car. If you’ve exceeded this when you voluntarily cancel your lease the extra miles will be charged for at a rate which was agreed when you originally signed the contract. The finance company charges for these additional miles as much of a car’s value is directly connected to its mileage.

Damage clause

You may be charged for ‘damage’ to the vehicle if the lender believes that any scuffs or scratches are more than normal wear and tear. The problem here is that it can be difficult to establish exactly what ‘normal wear and tear’ is. This unexpected payment can significantly increase the overall cost for you to cancel your lease agreement early.

If you are experiencing financial difficulties and can no longer afford your car lease or other household bills, Scotland Debt Solutions can help. Call our experts for a free same-day meeting, and receive the professional advice you need.