Problems making car repayments

A Personal Contract Plan (PCP) is a type of hire purchase agreement and tends to result in lower monthly repayments. You don’t own the car until you have made the final payment. The finance company are the owners of the car, not the garage you bought it from.

If you are having difficulties making PCP repayments

You may be allowed to sell the car to pay off what you owe, but you will need to get permission from the finance company, who are the owners of the car, to do this. Hire purchase contracts, which include PCPs, allow you to end your agreement using the ‘half rule’. This allows you to end your contract and give back the car, but you will still have to pay half the PCP price.

The ‘half rule’

The half rule is part of the Consumer Credit Act 1995 and gives you the right to end a PCP agreement at any time. The half rule limits your liability (the amount you are responsible for) to half the PCP price of the car. Your documentation (the agreement) from the finance company must show the figure for half the PCP price of the car.

If you have paid less than half of the PCP price of the car, you can give the car back, and you will only owe the difference between what you have paid, and half of the price of the car. You do not have to pay half the PCP price to the finance company before you end the agreement under the half rule. However, you will have to pay the difference between the payments you have made to date and half the PCP price.

If you have paid more than half of the PCP price of the car and have not missed any payments, you can end the agreement and hand back the car. You will be responsible for the cost of any repairs that are necessary. If you have paid more than half of the PCP price, you will not be entitled to any refund.

For examples of how the half rule works, take a look at our leaflet on ending a hire purchase agreement.

Can you end your agreement using the half rule even if you are in arrears?

Yes – you can end your agreement and avail of the half rule while you are in arrears. However, you will still owe the arrears to the finance company. They may also have the right to charge you additional interest on your arrears – called surcharge interest. You need to check your original agreement to confirm the amount of interest they can charge on those arrears.

Steps to take when returning a car under the half rule:

1. Write to your car finance provider or bank, telling them you want to return the car using the half rule – use our sample letter to help you. Don’t give instructions over the phone – putting it in writing makes it very clear how you want to end the agreement
2. Agree a pick-up point, or return the car yourself. If you don’t, you may be charged a collection fee
3. Take pictures of the car, inside and out, to confirm the condition of the car so you are not liable for any extra costs if the car gets damaged after you return it. If there is damage to the car, you may want to get the repairs done by your own mechanic before you send it back, or your provider may charge you for the cost of any repairs
4. It is very important to read any documentation sent out by your car finance company when you return your car using the half rule. Do not sign a ‘voluntary surrender form’ as you will give up your right to return the car under the half rule
5. Return the car to the garage, or to whatever location has been agreed between you and the finance company

If you have damaged the car and are returning it under the half rule, you must pay for the cost of any repairs. You will not need to make any further payments from the date you return the car. However, if your next payment has already been processed you should contact the finance company to get a refund.

Can your car be repossessed?

With a PCP, your car can be repossessed if the terms of the contract are broken, for example, by missing repayments. If you have paid less than one-third of the purchase price, the car finance company can take back your car without taking legal action against you. If you have paid more than one-third of the purchase price, a lender cannot repossess the car without taking legal action. In addition, the car cannot be repossessed from your driveway, regardless of how much money you’ve paid back.

If your car is repossessed, the finance company will generally sell the car and the money goes towards the outstanding debt, but you will still have to make repayments until the entire debt is paid off.

If you are struggling with debt, check out our debt action plan.

With a hire purchase agreement, you don’t own the car until you make the last repayment, so you do not have the option of selling it and using the money to pay off the balance on your agreement. However, you can return the car and end the agreement at any time using the ‘half rule’.

If you have short-term financial difficulties and want to keep the car, talk to your finance company; explain your situation and ask them to restructure the agreement. If your finance company agrees to restructure the agreement, be aware of extra fees and interest. You should ask the finance company to confirm in writing what terms the restructuring will take and what impact this will have – if any – on your original hire purchase agreement.

The ‘half rule’

The half rule is part of the Consumer Credit Act 1995 and gives you the right to end a hire purchase agreement at any time. The half rule limits your liability to half the hire purchase price of the car. Your documentation (the agreement) from the finance company must show the figure for half the hire purchase price of the car.

If you have paid less than half of the hire purchase price of the car, you can give the car back, and you will only owe the difference between what you have paid, and half of the price of the car. You do not have to pay half the hire purchase price to the finance company before you end the agreement under the half rule. However, you will have to pay the difference between the payments you have made to date and half the hire purchase price.

If you have paid more than half of the hire purchase price of the car and have not missed any payments, you can end the agreement and hand back the car. You will be responsible for the cost of any repairs that are necessary, and if you have paid more than half of the hire purchase price, you will not be entitled to any refund.

For examples of how the half rule works, take a look at our leaflet on ending a hire purchase agreement.

Can you end your agreement using the half rule even if you are in arrears?

Yes – you can end your agreement and avail of the half rule while you are in arrears. However, you will still owe the arrears to the finance company. They may also have the right to charge you additional interest on your arrears – called surcharge interest. You need to check your original agreement to confirm the amount of interest they can charge on those arrears.

Steps to take when returning a car under the half rule:

1. Write to your car finance provider or bank, informing them you want to return the car using the half rule – use our sample letter to help you. Don’t give instructions over the phone – putting it in writing makes it very clear how you want to end the agreement
2. Agree a pick up point or return the car yourself. If you don’t you may be charged a collection fee
3. Take pictures of the car, inside and out, to confirm the condition of the car so you are not liable for any additional costs if the car gets damaged after you return it. If there are damages to the car, you may want to get the repairs done by your own mechanic before you send it back or your provider may charge you for the cost of any repairs
4. It is very important to read any documentation sent out by your car finance company when you return your car using the half rule. Do not sign a ‘voluntary surrender form’ as you will give up your right to return the car under the half rule
5. Return the car to the garage or to whatever location is agreed between you and the finance company

If you have damaged the car and are returning it under the half rule you must pay for the cost of any repairs. You will not need to make any further payments from the date you return the car. However, if your next payment has already been processed you should contact the finance company to get a refund.

Can the car be repossessed?

The car can be repossessed if you break the terms of the agreement, for example, by missing payments. If you have paid off less than one-third of the hire purchase price, the car finance company can take back the car without taking legal action against you. If you have paid more than one-third of the hire purchase price, a lender cannot repossess the car without taking legal action against you.

The car cannot be repossessed from your home, regardless of how much money you have paid back.

If the car is repossessed, the finance company will generally sell the car and the money they get goes towards your debt but you will still have to make repayments until the entire debt is paid off. If you are in financial difficulties, make sure you know about your rights under the half rule and try to tackle the situation before the finance company repossesses the car.

If the car is repossessed, you will usually have to pay extra costs on top of what you owe the finance company. These costs may include a repossession fee and towing or trace fees, if the finance company had to tow or find the car.

What is voluntary surrender?

Voluntary surrender means that you volunteer to give the car back to the finance company but still have to pay what you owe – your debt does not disappear with the car. When you sign a voluntary surrender form, the finance company sells the car and the money they get goes towards your debt but you will still have to make repayments until the entire debt is paid off.

Voluntary surrender will usually cost you far more than returning the car using the half rule, as with the half rule you only owe half the hire purchase price. Depending on how much you still owe the finance company, and how much the finance company gets for the car, you could owe far more money with voluntary surrender than the half rule.

If you took out a loan to buy your car then you own the car from the start. So, if you get into financial trouble, go back to your lender and explain your situation. Ask them to restructure the loan agreement, so that you can afford the repayments, but be aware of any extra fees and interest. You also have the option of selling the car and using the proceeds to pay off the balance of your loan, or part of it.

Car finance rules may not apply if you bought a vehicle for commercial purposes, for example for a business. Note that car finance is different to a leasing agreement, which is commonly used to buy commercial vehicles or machinery. A leasing agreement is a legal contract between you and your provider.

If you have a vehicle for commercial purposes and are having trouble making repayments on your finance agreement, talk to your lender to see whether you can negotiate on the terms of the agreement. For example, will they extend the term, so your monthly repayments are reduced.