Are There Penalties For Early Settlement Of Car Finance?

Great, you have the funds to settle up your loan early! Well done! 🙌  Car finance plans are taken out for a set period, but is that actually a good thing? Will you incur costs to settle your loan, will it affect your credit score? These are all the questions we will be answering in today’s blog post. However, don’t worry, usually if you are in a position to pay off your debt ahead of schedule, this is possible, and it puts you in a comfortable place.

Can I hand my car back early on finance? Well, yes you can but some lenders will tend to include a prepayment penalty if you decide to settle your car finance early and it's after the end of the cooling off period of 14 days.  You have got to think that they are businesses as well, and they will incur a  loss if they will no longer receive all the interest you agreed to, so they simply add a clause to cover the loss associated. 

You never know how your situation is going to change, so before signing a car finance contract, just confirm with the company whether there are any penalties for car finance early settlement. This should be covered in the terms and conditions but do ask if you are not sure. This means you know where you stand later if your situation changes. 

Check out our video with the lovely Jade to explain more 

Early Repayment Fees

For your personal finances, being able to pay off a loan is a good thing. You will be paying less of the total  interest to the lender (car finance company), and saving yourself some money overall. 

Also known as early settlement fees, these early repayment costs amount to one or two months' worth of interest that the borrower would have paid. The fees vary from company to company; therefore, it's essential to compare the different rates before signing up for car finance. If you have read any of our previous blogs, you will know there are two different types of car finance; personal contract purchase & hire purchase. We will now go over the difference between how to end each agreement early. 

PCP Agreement

There is an option to voluntarily terminate your PCP agreement, as long as you have paid at least 50% of the total finance amount back to the company you choose, and yes, this includes the balloon payment. Along with this, the car needs to come back in a decent condition, and you can learn what an acceptable condition is from your car finance company. 

HP Agreement

The hire purchase agreement termination is very similar, however, there is no balloon payment, so you can usually pay off 50% halfway through your contract. You can make up the difference if you are looking for an immediate change, but most people just continue to pay until halfway. 

Why Would You End Your Car Finance Agreement Early?

Everyone has a different reason for giving back a car on finance early, but here are some of the ones we have found to be most common.

You Can't Afford The Monthly Payments

Your financial situation might have changed, and you can't now afford to meet these  monthly instalments. If this is the case, you may choose to trade in the car, especially if you are in a personal contract hire or leasing agreement.  But if you have an HP or PCP and can't afford to pay off the loan, then you must contact your finance provider to discuss your problems in meeting the repayments. 

You Need A New Car

Some buyers might be looking to get a new car and get a car finance deal from another lender. Before signing up for a new contract, you would need to settle the current agreement first.

You Don't Need The Car Anymore

For car finance plans such as leasing, you return the car to the dealership at the end of the contract. At the end of a PCP agreement, you can choose to pay it off, return it, or make a trade-in. If you don't need the vehicle anymore, you can simply make an early settlement.

How To Make A Car Finance Early Settlement?

Most lenders will have included a penalty in your car finance contract. If you are comfortable with the extra costs, here are several ways you can pay off the loan early.

Make Extra Large Overpayments

The car finance agreements indicate the fixed monthly payments you should make. However, if you suddenly find yourself in a better financial position, you can make large "overpayments" to reduce your debt and get out of the contract quicker. 

Make Higher Monthly Payments

With the fixed monthly payments, you can negotiate with your lender to increase the amount of these payments. The increased payments will reduce your loan over a much shorter time.

Pay It Off In Full

If you've got the full amount of cash owed sitting in your bank account, you may decide to pay off your loan in full. Contact the car finance provider to find out what your early settlement payment amount would be, and if you're happy, you can then settle the loan. 

Advantages Of Car Finance Early Settlement?

Before making a final decision, you need to decide if paying the car loan off early is the best plan for you. Here are some advantages of resettling your car finance early. 

Interest Rates

This one is really simple. You aren’t paying the car company for the full contract term, so you pay less in interest overall. When making monthly loan repayments, you are paying back the principal amount borrowed, interest, and any extra fees on top of that. 

Negative Equity

There aren’t many cars that appreciate in value, this would be limited to some classic cars, most cars depreciate in value and brand new cars depreciate very quickly. There is a good chance that if you have the vehicle for several years, the total loan costs will end up being higher than the actual original value of the car at that time. The best way to avoid this? Settle the loan early.

Other Financial Obligations

Early repayment of your car finance frees you up from debt. Settling the loan means you'll no longer be paying the monthly payments, so allows you to have extra money from your pay cheque each month to save up for that holiday or buy that new outfit you like the look of. 

Calculate your early settlement here 

What To Consider For Early Settlement?

It’s not all sunshine and rainbows though. Car finance early settlement does have its positives, but it's not always the right decision. Here are some other aspects to consider.

Your Credit Score

Paying early isn’t following the set schedule, and paying off car loans on the set schedule can actually positively impact your credit rating. You're demonstrating that you can keep up with your financial commitments over a period, and essentially that you're good at following instructions when it comes to money. Making regular payments will build your credibility and show that you are reliable in clearing your debts. If your credit score is on the lower end, it might be worth keeping your car finance deal, as it could positively impact your score in the future. 

Your Budget

Have a real think about your budget. You always need a rainy day fund. Early settlement may strain your savings and dry up your emergency fund. Therefore, it's crucial to analyse your current and expected future financial situation. 

Prepayment Penalties

This is something we wish we could tell our younger selves, and that is to fully read the contract! Lenders will include details of the prepayment penalties in the contract. Ensure you read your agreement carefully and confirm with your lender how much you will need to pay if you make an early settlement. Before making the final decision, weigh up the benefits and disadvantages of the early pay-off.

Your Other Debts

If you are paying off other loans, which could include your mortgage or personal loan, you should carefully check which one has the higher annual percentage rate (APR). If you have the money to pay one off, make a comparison between those loans and the car financing loan and decide which needs to be paid off first. The debt incurring the most interest should be paid off first, as you are spending more money on APR. 

Takeaways

Car financing companies do make the process of owning a car in the UK much more manageable. However, remember that your interest is the source of their income, so if they can't make these interest charges, they don't make any money, and can't operate.

Therefore, naturally an early settlement for car finance can attract extra charges in repayment penalties. While early payment might seem like a good move, you would still need to weigh up your options and be sure that you're making the right decision for you. 

So do think carefully before deciding, just like you would when deciding if car finance is right for you. If you are currently in that position, we have an early settle calculator that can give you a an estimate of what you'll need to pay.

From our blog with hundreds of articles designed to help you, to our calculator that gives you a car financing budget within seconds, Carmoola is here to help you on your car financing journey, and make it as straightforward, simple and quick as possible. 👍