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Partial Settlement: Car Finance Jargon Busters

What does a partial settlement on your car finance mean? 🤔 When you make a partial settlement on your account, it means there is an agreement between you and the car finance company that you can settle your account for a certain amount which is less than what you actually owe. 

The car finance company may offer a discounted settlement arrangement which you can accept or you may present an offer of repayment to your lender. Once you’ve made the necessary payments, your account will be settled. However, because you have not repaid your debt in full, it will still appear on your credit report that your account was partially settled or that you paid less than what you’ve actually loaned. And this will of course have a negative impact on your credit rating. 

How Much Should I Pay for My Partial Settlement?

Each car finance company will have their own approach to assessing accounts for partial settlement, and possible a car finance settlement figure calculator which you can use as a guide to how much you actually owe at any given point.  But if you cannot afford to fully re-pay this amount it's possible that the lender may offer you an arrangement whereby you pay off a certain lump sum for your car finance repayments, and then they will just write off the rest. 

By accepting this arrangement and making the lump sum payment, the lender will no longer pursue you or take any legal action in the future. Bear in mind, though, a partial settlement will stay in your credit report for up to six years and will also affect your credit score, and this is not good news for your future borrowing.

You may also choose to offer the car finance company an arrangement that is reasonable for you. But before you do it, it would be a good idea to evaluate your finances first so you’ll know how much you can afford to pay to settle your account partially. 

You may start by calculating the percentage of your outstanding balance. Say you have an outstanding balance of £10,000 and you have enough cash to offer 50% which is £5,000, then make sure that you inform the lender about it so you can show that you’re willing to pay off your debt, even partially. If you can offer more, up to 75%, then the better it would be for you because it's possible the car finance company would accept your offer.  

How to Get Out of Your Car Finance Deal Early

If your financial situation changed and you’re now struggling to make the monthly repayments, you might already be thinking about ending your car finance arrangement early. Before you do, you may want to learn a few things first so you’ll be as prepared as you can be for the steps you need to take. 

When to End My Car Finance Deal?

Each driver may have their own reasons for wanting to get out of a car finance agreement. If you want to reduce the cost of financing a car and you have enough cash to pay off your car finance early, then you can simply get in touch with the lender and inform them of your intention to pay off your debt ahead of time. Many car finance companies will have a settlement figure calculator on their website or app. Depending on your car finance product, and how far you are into the term, you may have to pay certain fees to end your car finance early. Be sure to ask your lender for an early settlement figure to include all of this. 

However, if you’re having trouble with the payments and you’ve missed a few of them already, then it’s better to inform the car finance company about your problem so they can help you out  - they might do this with a new payment arrangement. 

It’s always better to contact your lender and find a way to get out of your car finance deal than continue missing payments, falling into arrears, defaulting on your loan, and then allowing your credit score to suffer. Remember that all this will make it so much more difficult for you to get credit in the future if you’re applying for other financial products. 

How to End a PCP Deal Early

If you took out a Personal Contract Purchase agreement, it's worth asking the lender to calculate an early settlement figure if you want to retain the car. You may also return the car if you’ve already paid 50% of the cost of its value. Of course, know that you won’t get back the money you’ve previously paid when you return the vehicle. This kind of arrangement to end a PCP deal early is called “voluntary termination.”

You may sometimes choose this route if the car you have has depreciated so much that the remaining balance you have to pay would cost more than the current value of the vehicle. However, if the car’s current value is actually higher than your outstanding balance, consider paying a settlement figure so the ownership of the car can be transferred to you. Once you’re the owner, you can choose to sell it or part-exchange it for a new car

Ending an HP Deal Early

For a Hire Purchase deal, again you may return the vehicle if you’ve already paid 50% of the cost of the car. If you haven’t reached half, you may pay a lump sum to get to that halfway point and then return the car. Check your car finance contract for the total price of financing a car and the amount you have to pay if you want to return the vehicle. 

If you’ve decided to return a financed car, be sure to inform the car finance company by email or letter. See to it that you’ve kept a copy of it yourself as well. In your letter or email, make it clear that you want to return the car and end the car finance agreement early. If not, it might be interpreted as you defaulting on your loan, which can affect your credit rating negatively. 

Takeaway

Financing a car is a major financial commitment. You have to be able to make payments every month for the whole duration of your agreement with the car finance company. Before signing an agreement with the lender, you need to be truly certain that you can afford to make every payment on time. 

If you’re already in a situation where you cannot afford to continue to pay the car finance company, assess your finances and come up with an offer for partial settlement. It’s important to show the lender that you have the intention of paying off your debt and you’re not running away from it. A partial settlement, even if it will still pull down your credit score, is so much better than defaulting on your loan. 

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