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Will I Incur A Penalty If I Wish To Pay Off My Car Finance Early?

This is great - you are in a position to pay off your car finance earlier than you expected! 😁 But can car finance be paid off early? If you have a Personal Contract Purchase (PCP) agreement with a car finance company, and you want to cut the contract short, this article is for you. Learn about what you can expect if you end your car finance contract early, as well as the pros and cons of doing so. Let’s get started!

What’s a Personal Contract Purchase?

The PCP is a type of car finance that many car buyers use to purchase a car. You first need to make a deposit of about 10% of the car’s price. For the remaining amount, you can pay it off through monthly payments for the duration of your car finance contract, and then there is "balloon" or final repayment at the end if you wish to take full ownership of the car. 

This final payment is the car’s remaining value. Once paid, then the car is yours to own. If you don’t want to make the final payment, you can return the car, or you may also choose to have another PCP agreement on a new vehicle. 

But what happens if you want to buy the car before your contract ends? Or what if something goes wrong with your finances and you can no longer afford to make the monthly payments? These are two distinct examples of scenarios that car buyers could face. 

What Happens if the Contract is Cut Short?

When you enter a PCP car finance agreement with a lender, what you have to remember is that you pay a fixed amount for the monthly payments on a vehicle that loses its value. The depreciation happens fast when it’s still new. However, it slows down as the car gets older. 

What this means is that for the greater part of your PCP contract, the remaining amount that you have to pay is around what the vehicle is really worth by the end of the contract. So, in a few years time, when the contract ends, the car is going to be worth the final payment that you can choose to make so that you can own the vehicle. 

Of course if you have taken good care of the car, it may actually be worth more than that final payment. If this is the case, and you wish to trade back the care against a new model, then you can use the car’s added value towards the deposit for the next car that you want to acquire. Keep in mind that making a substantial deposit would mean you’ll pay less for your monthly payments. 

It is also this nature of the PCP car finance agreement that makes it complicated to cut the contract short. It wouldn’t be possible to return the vehicle to the car finance company and then end your agreement because, for the big part of the contract, the car is worth so much less than the amount that you still owe the lender. 

If you want to return the car early, expect that you’re going to have to pay extra so you can settle your PCP car finance. It may also include other fees and added interest. Knowing all these now, it’s important that you don’t stop making your monthly payments if you’re planning to hand the car back before your contract ends. 

If, for any reason, you need to terminate the contract, make it a point to talk to the car financing company. Be transparent with them if you’re having any financial difficulties,  and you won’t be able to keep up with the monthly payments. The lender will most likely make an arrangement with you to address this, and you won’t have to face so many issues regarding the termination of your car finance agreement. 

Can I Settle My Car Finance Early?

You may settle your car finance deal anytime. What you have to do is prepare the amount for the settlement. This would be the outstanding balance at that particular time. You may ask your lender to inform you how much the balance is exactly. 

Once you’ve paid the settlement amount, then the car is yours to own. You can choose to keep it, or you may re-sell it if you want. The car finance company will only be able to charge you interest of up to two months when they’re calculating the settlement amount. This is great news for you because it means you’ll be paying less interest if you settle your PCP car finance early. 

Benefits of Repaying Car Finance Early

When you settle your car finance early, it means that the car is yours, and you no longer have to make payments every month. It’s a great idea to do this if the settlement amount is less than what your remaining monthly payments are worth. So, it’s most likely that this will be towards the very end of your PCP car finance contract. 

Another option is reselling the car and then clearing your debt. You’ll surely have some extra cash left which you can use as a deposit for your new car. You may also choose to trade the vehicle and then use the additional value towards another car finance deal. However, remember that since the car isn’t under your ownership, the buyer will need to pay the lender directly since it’s the lender who owns the vehicle. 

You can still enjoy all the benefits of taking out a PCP,  even if you later choose to settle it early. Some of the incentives include free equipment packs, free servicing, deposit contribution discount, part-exchange offer, discounted price, and so on. 


So to summarise, if you decide you want to repay your car finance early, you will spend less overall in interest for the amount you borrowed from the car finance company. It cuts the overall charge you need to pay the lender. Make sure to check with the lender first at to how much your final settlement payment will need to be. 

Find out more about how car finance works! Check out our blog for the latest tips on car financing and car buying. Any questions? Then do reach out to us here at Carmoola! 

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