Understanding your finance agreement

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Intro

Car financing is one of the most popular ways to buy a car. Who has thousands of pounds sitting in a bank account? Not me, anyway…

When you decide to sign on the dotted line, make sure you understand your finance agreement.
However, sometimes life happens, and you need to get out of your finance agreement.

To make sure you fully understand what you’re getting into, here’s a quick run-down of the most common types of finance agreements, and how to cancel them!

What kinds of finance agreements are there?

There are two main finance deals you’ll have when buying a car – not including a personal loan. These are PCP and HP. Here’s how they work:

PCP:

Personal Contract Purchase is where you pay off the value of the car over some time, excluding depreciation. At the end of the contract, you pay a balloon payment. And the car is yours. The final payment is typically thousands of pounds, and many choose to hand the car back instead.

PCP is one of the cheapest ways to finance a car, but it’s not without its downsides. For one, you have a mileage limit. If you change jobs and have a much longer commute to work, then you may face excess mileage charges.

Secondly, you never actually own the car – unless you make the final payment, which means that any ding or dents on the vehicle that wouldn’t bother you will annoy your dealer! You could face damage charges for the condition of the car.

Finally, as with most finance options, you’ll be paying interest on the car!

HP

Hire Purchase, known as HP, is where you pay the car off over a contract term. Unlike PCP, you have no mileage limit and no final payment. The total cost of the vehicle is divided by the contract term. So if you buy a car at £5000 and pay over 48 months, you’ll pay £104 plus interest.

The advantage of HP is that you can sell the car on when you’ve finished your contract. While the car will likely depreciate quite a bit, you should at least be able to make some money back.

Can I cancel my finance agreement early?

Yes. Under UK law, you can certain types of car finance agreements before the end of the contract, and this is called voluntary termination.

Of course, if you’ve just taken out the finance agreement, you have a cooling-off period of 14 days to opt-out.

How do I cancel a PCP finance agreement?

You can cancel a PCP early if you’ve paid at least 50% of the total finance amount, including interest and fees back to the finance company. However, there’s a catch.

The payment will include the balloon payment due at the end – this means there’s no chance that you’ll have paid 50% of the total finance at the halfway point of your contract. Despite that, it still lets you cancel earlier than if you did nothing!

How do I cancel my HP finance agreement?

Voluntary termination here works the same as with the PCP agreement – you can cancel after paying 50% back. However, you don’t have a balloon payment, so this would happen a lot sooner than with a PCP.

Also, you can pay the money up to the 50% mark to opt-out. So if you’ve only repaid 40%, you can opt to pay an extra 10% to cancel your finance agreement.