Early Settlement: Car Finance Jargon Busters

Are you wondering if you can you get an early settlement on your car finance? Or perhaps you're not sure what it means? 🤔 You might be asking this question if you need to finish off your payments ahead of the agreed time frame with the car finance company. When you buy a car on finance, it means you’re legally bound to a contract with the lender for a set number of months, often say 36 months or three years. So do first decide if car finance is the right option for you. But what if you could and want to pay the loan ahead of time? Let’s find out what your options are for early settlement in car finance. 

Early Settlement on a PCP Agreement

If you’ve taken a Personal Contract Purchase car finance deal, you have the option to voluntarily terminate the agreement if you’ve paid at least half of the total amount financed. This does not mean just 50% of the vehicle’s value though. It also includes your initial deposit, the sum of the monthly payments as well as interest, and also the balloon payment, which you have to pay if you want to own the car. 

What happens if you haven’t reached 50% of the amount financed by the lender? In this case, you may return the vehicle and then pay the difference. Here’s an example of how this works. If the total finance amount is £20,000 and you’ve only paid £5,000 so far, then you need to pay an additional £5,000 when you hand back the car so you can settle your car finance contract early. 

When opting for an early settlement on your PCP agreement, you might want to know if the car has positive equity first. Positive equity means the vehicle’s value is worth more than the amount you still have to pay, including the optional balloon payment. 

Once you know the car’s value, the next step is to ask your car finance company for a settlement figure. This is the amount you would have to pay for the early settlement of your PCP deal if you want to own the car. Once you’re the owner, you can then sell it if you want to. 

Hire Purchase Agreement Early Settlement 

An early settlement on an HP deal is similar to PCP because you also have to pay a minimum of 50% of the total amount financed to you plus interest in order to process the voluntary termination of the agreement. With an HP deal though, there won’t be any balloon payment that needs to be paid so you could be the owner of the vehicle. 

As long as you’ve reached half of the total finance amount, you can then ask your car finance company for the settlement figure so you can pay what’s left of your outstanding payments. Once that’s done, then you’ll take over ownership of the car. You may then modify it to your liking, or sell it if you wish to. 

There’s also an option to return the vehicle if you haven’t reached half of the financed amount. Bu you still have to pay the difference though. Do note that the car finance company may charge you with penalty fees if the car has incurred damage beyond the usual wear and tear. 

Early Settlement on a Car Lease

Ending your contract on a car lease is different from getting out of a PCP or HP deal early. With a car lease, you need to return the vehicle and then you have to pay a fee for early termination. This fee might be almost as much as the total monthly payments remaining, with interest included. So, before you decide on ending your car lease agreement early, you may want to think things through carefully and ask for a settlement figure.

Voluntary Surrender vs. Voluntary Termination

If you want to end your car finance contract early but haven’t paid half of the total finance amount and you also don’t have the cash to pay the difference, there’s an option called “Voluntary Surrender Agreement.” This is different from voluntary termination but, with the voluntary surrender agreement, you may still have to pay additional fees. 

When you return the vehicle under a voluntary surrender agreement, the car finance company will be selling the vehicle at auction. You won’t have to pay anything else if the sale can cover all of the outstanding balance. However, if it doesn’t, then you still have to be prepared to pay the difference to the lender. Also, be ready for admin costs, additional fees, and repair charges if there’s damage beyond the usual wear and tear. 

Selling a Car with Outstanding Finance

If you’re wondering if you can sell a car with outstanding finance, the answer is no, this is something you cannot do. If you want to sell the vehicle, you first have to settle any outstanding amount you still owe the car finance company. Go through the legal process of acquiring the car and being the legal owner first. Once you’re the owner of the car, you can do whatever you want with it. It is recommended to all new buyers of second hand cars to perform an HPI check, so a buyer would know if you haven't repaid the loan.

Be aware that it’s against the law to sell a car that still has outstanding finance, especially if you are aware of the car’s finance status and you don’t tell the private buyer about it. You may try to find a car dealer who will buy the car by paying the settlement amount to the car finance company. Whatever your decision, make sure that you’re not breaking any rules stated on your car finance agreement. Otherwise, you might face legal issues with the lender and the private seller.  

Is Early Settlement a Good Idea?

The answer to this question depends a lot on your personal circumstances and your financial situation. If you have extra cash to pay off the loan early or if you don’t need the vehicle anymore or if you’re having difficulties making the monthly payments on time, then it’s worth considering an early settlement on your car finance. In the  case that you’re having trouble with your finances, do get in touch with your lender as soon as possible so they can guide you on the best steps forward. You may be able to adjust your repayments to enable you to cope with continuing the loan, so it's always worth checking that. 👍