Can I cancel my car financing for medical reasons?

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One of the questions we are asked a lot comes from people who have had unexpected medical problems and want to unload their car, either because they cannot drive or they need to save some money.

It’s usually quite a stressful situation and understandably people get frustrated if they don’t get clear answers from their auto finance company or other sources. Then of course there are privacy issues that prevent family members or loved ones from receiving information about a car financing account on your behalf if you cannot sort it out yourself.

But what are your rights and what can you realistically expect? There is a lot of misunderstanding about this and the myth that claiming “medical reasons” allows you to easily return your car and cancel your contract. This is just not true as I’ll explain below.

If your financial troubles are related to Covid-19, there are specific guidelines for auto finance companies that you must follow. However, this is not limited to medical reasons related to the coronavirus. It covers anyone whose financial situation has been affected by the complete upheaval in society over the past year.

The short answer

In almost all cases, there is nothing in your car finance contract that allows you to terminate your contract for medical reasons, no matter how serious the situation is. Even in the event of death, the finance company expects to get its money back from your estate.

There are also no real legal regulations that you can resort to to evade your debt.

Protecting your financial situation from medical problems is usually covered by either credit protection insurance (LPI) or payment protection insurance (PPI). After the PPI scandals in the early part of the last decade, it’s a far less popular product today than it used to be, though it’s never been that popular with car finance contracts anyway.

So the answer is superficial: No, you cannot terminate your car finance contract for medical reasons. They still owe money to the finance company and they still expect you to pay it back.

The longer answer

Unfortunately, the answer here is still no. However, there are steps you can take to reduce your costs, or at least make them manageable, which may be enough to help you get through a difficult financial period.

Even if the finance or leasing company has the right on their side on your contract, they still have an obligation to help a customer in trouble. Medical financial difficulties are certainly covered by this obligation, although the financial company’s definition of “help” is likely to be very different from yours.

Car financing and car leasing in the UK are regulated by the Financial Conduct Authority (FCA), a government-appointed agency whose job it is to ensure that financial affairs are handled fairly and responsibly.

All of the major UK companies that sell car finance or manage vehicle leasing are not only regulated by the FCA, but are also members of the Finance and Leasing Association (FLA) and / or the British Vehicle Rental & Leasing Association (BVRLA). Both organizations have codes of conduct that relate to how their members should treat customers during difficult times. For example, here is the FLA loan code.

In conclusion, your debt is unlikely to go away easily, but the financial company is committed to providing you with some solutions to help you ease your burden. You can also suggest solutions to the lender.

The type of assistance that the finance or leasing company is likely to offer or accept may include:

  • a payment leave to temporarily suspend your loan, usually for a period of three months
  • Reduce or waive interest and fees on the loan in order to reduce your monthly payments
  • Restructuring the loan to reduce payments (usually by extending the loan period by several months)
  • Accepting a reduced settlement amount for early repayment of the loan
  • the ability to sell the car to pay off your loan (if the value of the car is likely to cover the debt)

As you can see, none of the above suggestions will simply allow you to cancel the contract and get away with no further payments.

Relief now can cost you later

It is important to note that while some of the above offers sound helpful, they can also result in higher costs on your loan in the longer term.

For example, if you take three months of payment leave on your finance contract, you will accrue interest for the three months in which you do not make any repayments. This can add hundreds of pounds to your aggregate debt by the end of your contract. Likewise, there is a chance that you will pay more interest overall if your financial company offers to reduce your monthly payments but extend your term.

Another important point to note is that accepting changes to your loan can be recorded in your borrowing, which can affect your ability to borrow in the future. The fact that the help was requested for medical reasons does not protect you from it, even though your credit report does not reveal the reason for the contract change.

If you are in financial straits and cannot make your payments, getting your finances under control now is probably a much more pressing concern. But it’s still something to be aware of if you think it’s likely just a passing issue.

What about voluntary resignation or voluntary surrender?

These two things sound very similar, but are actually very different. They also only apply to secured car finance contracts such as PCP or hire purchase. They do not apply to leasing (contractual rent) or unsecured loans such as a personal loan with your bank. Again, “medical reasons” will not change your rights when it comes to minimizing your financial obligations.

Voluntary termination

We have a comprehensive guide to volunteering here at The Car Expert (it has been our most popular article over the past seven years!) So I won’t repeat it in detail here. The benefits to you will depend on the type of auto finance contract you have. If you have a PCP, you can usually only return your car free of charge in the final months of your contract. As you get closer to your TT point, it can still be a relatively inexpensive way to close your finance contract.

If you have an installment purchase (no balloon payment at the end), your voluntary walk-away termination point will be closer to half of your contract, depending on how much down payment you made at the beginning and whether you had a part-exchange.

When calling your financial firm on the voluntary termination process, make sure that you want to voluntarily terminate in accordance with your contract and the Consumer Credit Act 1974 (Section 99). That way they can’t “accidentally” misinterpret you and assume that you meant voluntary surrender, which you definitely don’t want …

Voluntary surrender

Voluntary surrender may sound very similar to voluntary termination, but it is a completely different matter. It really is the last resort when you have absolutely no other option to deal with your troubles.

Basically, you are handing the car over to the finance company and you do not agree to your agreement. You pick up the car and sell it at a commercial auction. The sale price of the vehicle will pay off some of your outstanding debt, but it almost certainly won’t cover all of it, so the finance company will be after you for whatever is outstanding. It also adds management fees, the cost of picking up the car, any damage beyond normal wear and tear, auction costs, and anything else you can think of.

The net result of all of this is that you may still owe the finance company thousands of pounds and your debt may not have been reduced at all. Also, if you disagree with the loan, you will have a large black mark on your borrowing. Plus, by the time they volunteer their car, most customers have already missed some payments and have to deal with debt collection agencies and negotiations with the finance company.

It’s all deeply uncomfortable in every way, so like I said, it’s definitely the last resort and claiming medical reasons isn’t going to help you. Really, the only scenario that’s worse is doing absolutely nothing and waiting for the financial company to send collection agents to repossess the car and bully you for money you don’t have.

Act early to minimize the pain

As annoying as it may be to try and choose the worst-case option to sort out your auto financing when you are already dealing with medical issues, one of the most important things you can do is act early – am best before you start missing out on payments and your account will fall into bad standing.

The finance company is much more likely to be responsive to the medical problems you cause when your account is still up to date and no payments are missed. They are required to show you ways to settle your debts or manage your payments, but if you’ve already defaulted on payments and the money has been turned over to a debt collection company, it will be much more difficult to sort things out.

Falling behind on your payments can also affect your ability to voluntarily terminate the contract, potentially cutting you off another potential solution to your problem.

Finally, since we are talking about this primarily because significant medical issues have impacted your household finances, finding an early resolution will help keep your stress under control and prevent further harm to your health. Having peace of mind, even when it’s not the solution you want, can also help your family deal with whatever comes your way instead of waiting for debt collectors to knock on your door to deal with it.

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