Paying Off Car Finance Early: Avoiding Penalties
Paying off car finance early can save you money in the long term. However, you need to make sure you won’t be penalised for doing so.
Depending on the type of car finance agreement, you may not be able to make an early settlement payment at all.
Read on to discover what to expect if you end your car finance agreement early, and the pros and cons of doing so.
Explaining Early Repayment in Car Finance
Early repayment in car finance lets you pay off your car finance before the term ends, saving you from future interest costs.
You will typically make a lump sum payment to pay off the loan early, plus any interest and fees set by the lender.
The benefits of paying off car finance early include the fact you'll potentially own your car outright sooner (if you chose HP finance). You’ll also often save a lot of money on interest in the long run.
It also won’t negatively impact your credit score, in fact, it could improve it.
However, it's crucial to understand your loan agreement terms before taking the leap. While early repayment can save you money on interest, it may not be the best option for everyone.
Are There Penalties for Paying Off Car Finance Early?
The short answer is it depends on your loan agreement.
Some contracts have prepayment penalties or fees for settling the loan ahead of schedule.
Before you consider an early payoff, make sure to read the fine print or consult your lender to avoid any unexpected fees.
The amount you’ll need to pay if the lender does have a penalty will differ. Each lender sets their own fees and conditions.
Calculating Settlement Figures: Know Your Options
Determining the exact amount needed to settle your car loan early is easier than you might think. You can use an early settlement calculator to see exactly how much it will cost you.
Your settlement figure includes the remaining loan balance and any interest or fees that may apply. This number can change based on the time of the month and the specific terms of your loan.
You'll also want to factor in any early repayment charges, if applicable. Most lenders provide easy ways to request this information, so don’t hesitate to reach out to them if needed.
It's also worth noting that some lenders may offer you a partial early settlement option. This lets you make an overpayment without completely paying off the loan.
A partial early settlement can reduce future payments or shorten your loan term.
Benefits of Early Car Finance Repayment
When you settle your car finance early, you will no longer need to make payments every month. The car will be yours, and you could save a lot of money on interest.
Clearing your debt is another clear benefit of settling your car finance early.
Maybe you’re in the process of enquiring about another type of loan such as buying your first house. Having too many loans at once can affect your ability to take out new ones.
Thinking of switching to a new car after paying the current one off? With early car finance settlement, you might even have some extra cash left which to use as a deposit.
You could also choose to part-exchange the vehicle and then use the remaining value towards another car finance deal.
The most important thing to consider is whether you can afford to pay the settlement amount. If not, other options like refinancing may be best.
Refinancing is ideal if you have a good credit score, and you want to benefit from lower interest rates.
How to Save Money by Paying Off Car Finance Early
If you want to save money by paying off car finance early, start by talking to your lender.
Ask them what the payoff amount will be, and whether there any prepayment penalties.
Once you have a clear picture, you can make a one-time large payment, or simply start paying more than the minimum monthly amount.
Make sure you tell the lender that the extra amount should go towards the principal, and not the interest or future payments.
If you have taken car finance out with Carmoola and want to pay it off early, get in touch with us for a quote.
Read more about paying off car finance early:
- Early Settlement: Car Finance Jargon Busters
- How to Calculate My Final Settlement Payment for Car Finance
- How Do I Repay My Car Finance Loan Early?
FAQs on Car Finance Early Payments
What Is a Settlement Figure in Car Finance?
A settlement figure is the total amount you need to pay to clear your car finance ahead of the agreed schedule. This typically includes the remaining loan balance, plus any interest or fees that may apply.
Can You Pay Off PCP Agreement Early Without Penalties?
It depends on your specific agreement. Some Personal Contract Purchase (PCP) agreements allow for early repayment without penalties, while others may charge a fee for the privilege. Always consult your contract or speak with your lender to understand the terms.
How Does Early Repayment Affect Car Finance Interest?
Early repayment usually reduces the amount of interest you'll pay over the life of the loan. By lowering the principal balance sooner, the interest has less time to accrue, saving you money in the long run.
Will Paying Off Car Finance Early Improve My Credit Score?
Generally, paying off a car loan early can have a positive impact on your credit score by reducing your debt-to-income ratio. However, it might also slightly reduce the diversity of your active accounts, so the net impact could vary.
What Are the Legalities of Paying Off Car Finance Early?
The legalities of early settlement depend on the terms of your loan agreement. While you're generally allowed to pay off your car finance early, some contracts may impose prepayment penalties.
Is it worth paying off car finance early?
It can be worth paying off car finance early if you stand to save on interest and there are no hefty prepayment penalties. Weigh the pros and cons to make an informed decision.