Making Cents: Drive away from car repayments in Limerick using the half rule

IF  I TOLD you, you could walk away from a car loan and hand back the keys and not have to pay back the balance outstanding, would you believe me?

When I posed this question to some people last week, they all said they didn’t think it was possible.
And they’re right and wrong.

Because there is one and only one type of car loan where you can hand the keys back and make no further loan repayments, and it’s a Hire Purchase agreement, which is more commonly known as a HP loan.

And very quickly, the big characteristic with a HP loan is that the car does not become yours until you make that very last monthly repayment, so you are effectively hiring the car until you make that last payment. And then and only then does the ownership of the car becomes yours outright.

The ability to make no further payments on a HP loan is known as the Half Rule.

You see under Section 63 of the Consumer Credit Act 1995, the half rule allows you to limit your liability to half the purchase price of the car, and if and when that becomes the case, you can return the car and end your HP loan agreement.
Let me show you how this works in practice.

Let’s assume, Jenny bought a car costing €20,000 and she arranged finance through the dealership who arranged it over five years. They asked for a €2,000 deposit, so she borrowed €18,000, which means her monthly repayments would be c. €372.78.

The interest charges would amount to €4,517 (APR 9.6%) and that along with a documentation fee of €75 and a purchase fee of €75 when the final repayment is made, means the total hire purchase price amounts to €24,517.

Which means half the hire purchase price is €12,259.

So, with Jenny making those monthly repayments of €372.78, in month 33 she would have paid half of the hire purchase price i.e. €372.78 x 33 = €12,302.

And if she hadn’t missed any repayments, and Jenny wants to give the car back, she can. She could write to the finance company, saying:

Heading: Termination of Agreement Under The Half Rule.

Re: HP Loan Account Number: 12345678 (car make/model/reg number)

I am going to exercise my right to terminate my above number agreement using Section 63 of the Credit Consumer Act 1995.
Kindly acknowledge receipt of this request, and please advise how the said vehicle can be returned to you.

Thank you, Jenny.

And if by chance Jenny was behind on repayments, she could still use the half rule, but she’d still owe the arrears to whoever helped her finance the purchase of the car. And they could charge her interest on the arrears, and this is commonly known as surcharge interest.

So, let’s assume Jenny made those 33 monthly repayments and has paid half the hire purchase price but didn’t give the car back and continued driving it for the next five months but made no repayments.

If she did, her arrears would stand at €1,863.90.

She can still end the HP agreement and give the car back, but she’ll still owe the arrears and that will have to be paid back along with any interest accruing in the interim.

Let’s forget about arrears for a moment because there’s another scenario where Jenny could end the HP agreement even if half the hire purchase price hasn’t been paid.

If Jenny had made 26 monthly repayments of €372.78, she’d have paid back €9,692 which is less than half of the hire purchase price of €12,259.

So, the difference in this instance is €2,567.

If Jenny wants to fast forward the Half Rule, she can but she’d need to pay €2,567 to the company who helped her finance the purchase.

On the flip side, let’s assume Jenny made 40 monthly repayments i.e. €14,911 and was well over the half rule number, she can’t ask for a refund of what the difference is before handing the car back. Well she can ask alright, but she’ll be told, no.
Okay, 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, they would recommend 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. So be very careful about what you sign.

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. And again, when the finance company sends you forms to sign, do not sign anything that refers to and agrees to a voluntary surrender.

3. Agree a pickup point or return the car yourself.

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4. 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’d prefer the company to collect the car.

5. 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. And if there are damages to the car already, you may want to get the repairs done yourself before you give it back or your provider may charge you for the cost of any repairs.

6. Return the car to the garage or to whatever location and time is agreed between you and the finance company.

If you are in a situation where you no longer want or need your car or you simply cannot afford the monthly repayments any longer, then get out your loan agreement to see what type it is. If you can’t find it, request it from the finance company. If by chance it’s a HP agreement, look at the hire purchase amount and then divide it in two and if you have repaid at least that amount, then you qualify under the half rule. I suspect that there are thousands of people struggling to make car loan repayments who are unaware that this rule may actually apply to them, and you know it could end up saving them thousands of Euros and help with their monthly cash flow.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie