They can giveth...and you can giveth back. Use this 'half measure' to walk away from unwanted car loan
There was an excellent report released last week by the insurer Aviva, called Family Finances, which included the finding that around 1 million people are struggling with their finances.
This could be down to having high mortgage repayments, large childcare costs, lower salaries and high debt repayments. For many it is probably a combination of all the above.
An area I come across all too frequently, that has a big impact on peoples monthly cash flow is the amount they are paying each month, servicing car loan repayments. As you probably know by now, I’m not a big fan of taking on high debt to finance the purchase of a car. I see how people struggle to make the repayments each month, and the pressure it puts on them.
I also see the impact those payments have on other areas of their finances i.e. their inability to put money into pensions, overpay on their mortgage, save for emergency funds and so on. They can’t do these things because they have no money left over each month and large car repayments are one of the reasons why.
When people start looking at cutting back on their monthly outgoings how many will have looked at easing the pressure by stopping making car loan repayments and handing their car back?
You might think, if only it was that easy.
But you know what? It just might be for some. Let me explain.
If you bought a car and you arranged the finance by way of hire purchase, there is a piece of consumer protection attaching to this type of loan agreement known as the Half Rule.
It allows you to end the loan agreement, and return the car to the bank who lent you the money, provided you have paid half the hire purchase price. So, once you satisfy those conditions and are happy to give the car back, your monthly loan repayments come to an end. This won’t affect your credit rating either.
For example, say you bought a car costing €15,000 by way of hire purchase. You paid a deposit or had a trade-in value of €3,000 and you financed the balance. That €12,000 was going to cost an additional €2,359 in interest payments and along with some small closing fees, the total cost of the hire purchase agreement was c. €14,459.
The monthly repayment attaching to the €12,000 you borrowed over, say, five years would be about €239.
Once you have made 31 monthly repayments, you can give the car back and end the loan agreement using the Half Rule, and no more loan repayments of €239.
If you made repayments that exceed the half rule number, you can still avail of it and terminate the loan but any excess amount over and above the half rule number will not be refunded. In the example I just gave, if you made 45 repayments of €239 i.e. €10,755 and the half rule number is €7,230, you will not get a refund of the difference between both. And even if the amount you have repaid exceeds the half rule amount, but you are in arrears on your loan, they still have to be repaid in full. The excess amount over the half rule number can’t count for any arrears owing on the loan.
You don’t have to wait until you reach the half rule amount either to terminate your loan agreement, but in this instance you will have to make up the difference.
If, for example, you made 20 monthly repayments of €239 i.e. €4,780 and you want to terminate your loan agreement, you have to give an additional €2,450 to bring the amount you pay back up to the half rule amount which in this instance is €7,230.
So, how do you go about returning the car and ending your loan agreement using the half rule? Well according to a document issued by the Competition and Consumer Protection Commission, you do the following:
1. First of all, it’s 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. Voluntary surrender means that you volunteer to give the car back to the finance company but still owe the balance due on the agreement – your debt does not disappear with the car. 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.
2. Write to your car finance provider or bank, and explain you want to return the car using the half rule. Don’t give instructions over the phone. Putting it in writing makes it very clear how you want to end the agreement.
3. Agree a pick up point or return the car yourself. If the hire purchase company collects the car, you may be charged a collection fee, so make sure you ask how much this is if you would prefer the company to collect the car.
4. Take pictures of the car, inside and out, to confirm its condition 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 already, you may want to get the repairs done before you give it back or your provider may charge you for the cost of any repairs.
5. Return the car to the garage or to whatever location and time is agreed between you and the finance company.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie