If you’re financing a vehicle in the UK and want clarity on ending your agreement early, this guide explains the thirds rule, how it functions, and its implications for you.
Breaking down the thirds rule
The thirds rule is a legal protection for consumers under the Consumer Credit Act of 1974.
If you’ve taken out a hire purchase (HP) agreement to finance your car, the thirds rule can be an important safety net. Essentially, it means you have the right to end your agreement once you’ve paid a third of the total amount owed.
This total amount includes the car’s price, the interest charged, and any additional fees detailed in the agreement. If you’ve reached that one-third milestone, you can voluntarily terminate the contract and return the car without facing further financial penalties, provided the vehicle is in reasonable condition.
This protection is particularly useful in situations where unforeseen circumstances make it difficult to continue with payments.
How to calculate the one-third amount
Your car finance agreement will clearly outline the total amount payable. To find the one-third figure, simply divide that total by three.
💡 Example: If the total amount payable is £18,000, one third would be £6,000. Once you’ve paid £6,000, the thirds rule comes into play.
It’s worth noting that your monthly payments might not align perfectly with this one-third amount. The one-third milestone could fall in the middle of a payment term, so checking your agreement and staying on top of your repayments is key. Regularly reviewing your payment schedule can help you better understand where you stand.
Why the thirds rule exists
The thirds rule was designed to protect consumers from excessive financial liability. Cars are depreciating assets, and circumstances can change. You might lose your job, experience financial hardship, or decide that the car no longer meets your needs. Whatever the reason, the thirds rule provides an option to step away without owing the full balance of the agreement.
This protection ensures that consumers are not locked into agreements that could place them under financial strain. It’s a practical safeguard, especially for those who may encounter significant life changes, such as relocation or a shift in income.
What happens if you’ve paid less than one third
If you haven’t yet paid the one-third threshold but need to end your agreement, things can get more complicated. In such cases, you may still be able to terminate the agreement, but you’ll likely owe additional fees or the difference between what you’ve paid and the one-third amount. The finance company might also charge for any damages to the vehicle beyond reasonable wear and tear.
It’s essential to keep the vehicle in good condition, even if you haven’t reached the one-third mark. Additional charges for damage can increase your financial burden, so regular maintenance and care are crucial.
What happens if you’ve paid more than one third
Paying beyond the one-third point gives you even more flexibility. You’re still entitled to return the car, and there won’t be any further payments as long as the vehicle’s condition is satisfactory.
However, if you’re close to the end of the agreement, you might consider paying off the balance entirely to own the car outright.
The decision to return the car or complete the agreement will depend on your personal circumstances. If the car continues to meet your needs and you’re in a stable financial position, completing the payments could be the better option. Conversely, if the vehicle no longer fits your lifestyle, the thirds rule provides a way out.
How the thirds rule affects credit scores
Terminating a car finance agreement under the thirds rule won’t negatively impact your credit score, provided you follow the correct procedures. The key is to ensure all your payments are up to date and that you’ve fulfilled your legal obligations under the agreement.
Any missed payments or disputes could result in damage to your credit history, so always communicate with your finance provider to avoid misunderstandings.
Keeping clear records of your payments and correspondence with the finance company can also safeguard against potential disputes. Documentation is your best ally in demonstrating that you’ve adhered to the terms of your agreement.
Things to consider before returning the car
Before you make the decision to use the thirds rule, it’s worth considering a few practical points:
- Vehicle condition: The car must be returned in reasonable condition. Damage beyond everyday wear and tear could lead to additional charges, even if you’ve paid the required amount. Routine maintenance and addressing minor issues before returning the vehicle can save you from unexpected costs.
- Alternative transport: Make sure you have a plan for how you’ll get around after returning the car. Depending on your circumstances, this might involve buying a cheaper vehicle outright or using public transport. Weighing up the costs and convenience of alternative options can help you make a more informed decision.
- Future financing: While using the thirds rule won’t harm your credit score if handled properly, it’s worth considering how future lenders might view the termination of your agreement. Some lenders may see it as a sign of financial instability, so being prepared to explain your decision can be helpful.
Is the thirds rule right for you?
The thirds rule isn’t a one-size-fits-all solution. It’s ideal for situations where continuing payments would put you under financial strain or where you no longer need the vehicle. However, if you’re close to completing the agreement, you might decide to stick with it and own the car outright.
For example, if you’re only a few months away from completing your payments, the additional costs of finding alternative transport might outweigh the benefits of returning the car. On the other hand, if the vehicle has become impractical for your needs, the thirds rule offers a straightforward way to move on.
Practical steps to follow
If you’ve decided to use the thirds rule, here’s how to go about it:
- Review your agreement: Check how much you’ve paid so far and confirm whether you’ve reached the one-third threshold. Pay close attention to any additional fees or conditions outlined in the agreement.
- Contact your finance provider: Inform them of your intention to voluntarily terminate the agreement. Most providers will have a formal process for this. Clear communication is essential to ensure a smooth termination.
- Prepare the car: Ensure the vehicle is in good condition and that all documents, such as the service history and logbook, are in order. Cleaning the car and addressing any minor repairs can make the process smoother.
- Return the car: Follow the instructions from your finance provider to return the vehicle. Be prepared to inspect the car together with a representative to avoid disputes over its condition.
Final notes
Understanding the thirds rule can make a significant difference when managing car finance. It’s a consumer protection mechanism that ensures you have a way out if circumstances change. By knowing your rights and responsibilities, you can make informed decisions that suit your financial situation and future plans.
🚗 You might like this guide: What Is The 3% Rule In Car Finance?
