How Can I Reduce My Car Finance Debt?

Buying and keeping a car running can be pricey, and for many, car finance eats up a significant portion of their monthly earnings. And with the cost of living going up and interest rates increasing almost everyone is feeling the squeeze. And trying to reduce your car repayments is one area you might be considering. 

If it makes financial sense, you can choose between a few options for lowering your car credit repayments. You can refinance your car for a cheaper interest rate or at the conclusion of a PCP arrangement, for example. Before making a final decision, it is critical to spend time investigating your alternatives.

Want to know how to reduce your car finance debt? Read on! We’ll tell you all about getting out of car finance debt, how to refinance car for lower payment and more. 

How To Get Out Of Car Finance Debt

First of all, it’s good to know that if you want to lower your monthly car loan payments but are unclear on how to do it, it's always a good idea to contact the lender. They will know how to advise you on your alternatives and assist you in making the best decision to reduce your payments.

If you are having difficulty making car financing payments, your rights will change depending on the sort of car finance you went for. When you purchase a car through HP, the lender effectively owns the car until you have completed all of the previously agreed-upon instalments. This means that you can't sell it, but you may be able to receive a payment holiday.

When terminating contracts early, do take into consideration the fact that your car's condition will be critical. Normal wear and tear is allowed, however, you may be charged for repairs such as broken side mirrors or bigger scratches.

Terminating Personal Contract Purchase (PCP) Early

Under the Consumer Credit Act of 1974, you have the right to return your car to the finance provider if you have already paid half the cost of the car or make up the difference based on what you have already paid. This is what is known as 'voluntary termination.'

Returning your car can make sense if, for example, its worth has fallen to the point that your outstanding payments would exceed its current value. However, if the car's current worth exceeds your outstanding payments, you could be better off paying the financing company a settlement sum and then reselling the car.

Early Payment of PCP Contracts

If you wish to pay your PCP agreement off early, the first thing to do is to request a settlement quote from your car finance provider.  This is the amount of money required to get voluntary termination of your car loan.

Then, you have two options:

  • Pay off the agreement and keep the automobile if the settlement sum is less than the cost of continuing to make monthly repayments.
  • Pay off the agreement early and then sell the car if you are short on cash and the amount you receive for the car does not leave you significantly out of pocket. But keep in mind that you can't sell the car until you've paid the settlement amount.


Refinancing: How Does It Work? 

If you have an existing loan, refinancing to decrease interest rates and monthly payments is usually the best option to minimise costs. You can dramatically reduce the amount you pay monthly by lowering the interest rate on a new loan. You can refinance an HP agreement or a PCP. Either way your first course of action will be to get a settlement figure from your existing lender, then search around for a good deal from a new lender  - a lower interest rate would be ideal, or sometimes you can simply extend your term. 

There are numerous reasons why you might wish to refinance your car at the conclusion of your loan term. For example, if you have a Personal Contract Purchase (PCP) arrangement and are unable to make the final balloon payment. 

If you refinance at that point, and make the balloon payment, you will be allowed to keep the car; otherwise, you will be obliged to return it. This may necessitate switching to a new PCP arrangement. It will be determined by your provider's corporate policy and, most likely, your credit score.

Is Voluntary Termination a Good Idea? 

It will appear on your credit report if you utilise voluntary termination to cancel your arrangement early. There will be no evidence as to why the arrangement was terminated, so it might look a bit sketchy on your record. It will have little or no impact on your total credit score though, so it is a far better option than skipping payments, which will have a strong influence on your credit file and make it difficult to take out any kind of loan in the future.

Because car finance providers lose money when contracts are terminated early, they are generally rather uncooperative when it comes to obtaining voluntary termination. They might try to extend the procedure as long as possible.

To avoid this, send them a letter stating why you want to leave on your own terms. You are not required to sign any agreements or complete any termination packets. 

You might even learn that the credit company wants to charge you based on your car's mileage. This is because you will have logged more miles than they anticipated. It's important to know that they cannot actually legally charge you a penalty for this if you have taken appropriate care of the vehicle.

The Bottom Line

By the way, here at Carmoola, we provide a simple and straightforward approach to obtaining car finance. Use our calculator to see how much you will spend each month if you finance your next car via our handy app.

Shopping around, checking your credit score, refinancing, or simply extending your term are all options for lowering your auto costs. After you've decreased your monthly payments, you can spend your efforts on driving your beloved car and enjoying the additional cash you've saved.

Need more car finance help? Check out our blog which has so many resources you can learn from! We also have another article about how to reduce your car finance spendings. 👍