SDAS consultancy case study
My client can no longer afford the payments for their hire purchase agreement, and they have three months of arrears.
I've advised they could terminate and send the vehicle back, but the finance company will not allow it because my client has paid less than half what they owe. Can they do that?
Your client's right to terminate their agreement
Your client has the right to terminate their hire purchase agreement and limit what they owe. The creditor cannot refuse to accept the termination because of the amount your client has paid.
The right to terminate the agreement comes from section 99 Consumer Credit Act 1974. It only applies to hire purchase and conditional sale agreements. The agreement should explain the right to terminate.
If your client terminates the agreement, the amount they must pay back is capped. They should not normally have to pay more than half the total price (including the interest and charges), less the amount they have already paid. If they have paid more than half, they won't receive a refund of the difference.
Follow the steps below to calculate how much your client must pay.
find the total amount payable under the agreement, including interest and charges
divide that amount by 2
deduct the amount your client has paid
add the amount of the arrears
The figure you reach after following these steps is your client's final liability. There could be other charges added, for example, if the creditor needs to collect the vehicle, or if there is damage that needs to be repaired.
When your client could lose the right to terminate
The finance company can terminate the agreement once it has given your client a default notice, and that notice has expired. When that happens, the debtor loses the right to terminate, and they will be liable for the full amount under the agreement.
That means it's important to act quickly if the account is in arrears, so your client can terminate the agreement first.
How to terminate a hire purchase agreement
Your client must give written notice to the company that receives the payments. The letter must make it clear that your client is exercising their right to terminate the agreement under section 99 Consumer Credit Act 1974 and ask how they should return the goods.
It's a good idea to send the letter recorded delivery, so there can be no dispute about whether it was received.
National Debtline has a template letter on its website that you or your client can use to terminate a hire purchase agreement.
You didn't say if there is a joint debtor. If your client terminates the agreement, the termination is binding on the other person.
Terminating the agreement with arrears
Creditors sometimes say the debtor cannot terminate when they have arrears. They seem to base this on the wording that must be contained in the default notice. That states:
'If the date for the final payment has not passed and you wish to end this agreement, you should write to the person to whom you make your payments. You will need to pay [insert amount] if you wish to end this agreement by the date shown and we will be entitled to the return of the goods. You will also be liable for costs if you have not taken reasonable care of the goods.'
From schedule 2(9) Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983.
This statement might seem confusing at first, but creditors are wrong to say it means the debtor has to pay what they owe before they can terminate the agreement.
Returning the goods
Your client is responsible for returning the vehicle following the termination of the agreement. The creditor could claim their costs back from your client if it has to be collected. Your client could challenge the creditor's costs if they do not allow your client to return the vehicle, or if they say it has to be returned to a location an unreasonably long distance away.
If the creditor refuses the client's termination
Your client could complain to the creditor, pointing out that sections 99 and 100 of the Consumer Credit Act 1974 do not include a requirement that a sum is paid as a pre-condition of terminating the agreement. If the creditor does not accept your client's complaint, they could escalate it to the Financial Ombudsman Service.
Find out more about how to complain about a bank or lender on Shelter Legal.
Ultimately, it would be up to a court to decide the amount due. If your client terminated the agreement correctly and in time, the court should find in their favour. They should be ready to submit a defence if a court claim is issued.
Find out more about how to defend a court claim on Shelter Legal.