The Government is facing increasing pressure to clamp down on dubious voluntary termination of finance deals as part of its review of the Consumer Credit Act.

The Society of Motor Manufacturers and Traders says the existing voluntary termination clause needs to be restricted, as some automotive retailers are using it as a loophole to increase sales and revenue.

Voluntary terminations (VTs) were set up to allow people struggling to meet repayments – for example because of personal injury or loss of job – to hand the car back to the manufacturer.

But the SMMT is concerned that dealers are encouraging drivers to terminate loans early and then selling them a new car along with a replacement credit plan. That can be bad news for consumers – the SMMT claims they can sometimes find themselves trapped into a credit agreement with an even higher annual percentage rate.

One high profile dealer chief told AM: “We have a lot of people wanting to change their car after 27 or so months on a 36-month plan because the deals on new cars is so good – it's a great earner for us.” For the manufacturer, residual values can be hit hard if a wave of cars comes back early from hire purchase agreements and is then distressed sold through auction.

The SMMT, which says up to 70,000 cars a year are subject to VTs, has voiced its concerns to the Department of Trade and Industry. The DTI has prepared a white paper as part of the Consumer Credit Act review, which will be discussed by MPs later this year.

Patricia Hewitt, secretary of state for trade and industry, says in the paper's foreword: “New protections will go hand in hand with a series of changes to promote a more open, competitive market, offering more choice and less restriction.”

Nigel Williams, of Black Horse Vehicle Management, says it is too early to say what effect proposed changes will have. “We are working with dealers to discuss the issues that may affect our sector,” he says.