Should you pay off car finance early?

Paying off your car finance is an option for many people. Often, settling your car finance agreement before the end of the term can be advantageous. However, in some situations, it can leave you out of pocket! Read more to find out how paying off your car finance early could work for you!

Can you pay off car finance early?  

Yes, you can settle your car finance agreement early at any time! Most car finance agreements, such as Hire Purchase and Personal Contract Purchase, allow you to settle your car finance early. You can either pay off your car finance early by making one lump sum payment or you can increase your monthly payments to pay off the loan quicker. However, there are a few things you need to be made aware of if you wish to settle your finance.  

Is it right for you?  

Paying your car finance off early has many benefits, but it can depend on your circumstances. Let’s look at the pros and cons of paying off your finance and when it would make sense.  

Why should you pay off car finance early?  

• You want to save on interest. 

• You have extra money to increase your payments or make one lump sum payment.  

• You want to take ownership of the car. 

• There’s no penalty fee to end the agreement early.  

• You don’t need the car anymore.  

• You want to reduce your monthly expenses by paying it off in full.  

When is it not a good idea?

• You can’t afford to pay off your agreement.  

• Your car is in negative equity.  

• Your current loan has a low interest rate.  

• Repayment fees or resettlement fees are high.  

• You’re applying for new credit soon (repaying early can cause a dip in your credit score).  

• If you have other high interest debts which could be paid off first.  

How to pay off car finance early?

Before you can settle your car finance early, you’ll need to request a settlement figure from the lender. This will show the exact amount you owe. To pay off your car finance faster than you had originally agreed to, you have three options. 

1. Lump-sum payment.  

Paying off your car loan with a lump sum payment is one of the easiest ways to take ownership of the car. Simply pay the full amount as requested on the settlement figure sheet, and the lender will process the payment and hand the title of the car over to you.  

2. Increase your monthly payment.

If you find yourself in a new position where you have more disposable income each month, you may want to consider increasing the monthly payment on your car finance deal. Making larger payments can help to shorten the loan term and pay it off faster. Before you go ahead though, reach out to your car finance lender and see if this is something they offer.  

3. Make overpayments.  

If you can’t commit to increasing your monthly payment, you can still overpay on your car finance. Overpaying is when you make one-off overpayments when you are financially able to do so. If you find yourself with some extra cash one month, you can make a payment towards reducing your total amount payable, without committing to it each month.  

How soon into car finance can you pay it off?

In theory, you can pay off any outstanding car finance at any point of the agreement. Through early settlement, you’ll be able to pay off any outstanding finance in one lump sum, or you can increase your monthly payments to shorten the loan term. Before you can pay off your agreement, you’ll need to obtain a settlement figure from your lender. The settlement figure will tell you exactly how much you owe and will include the remaining balance, any interest, and any early settlement fees. 

How soon into car finance can you pay it off?

In theory, you can pay off any outstanding car finance at any point of the agreement. Through early settlement, you’ll be able to pay off any outstanding finance in one lump sum, or you can increase your monthly payments to shorten the loan term. Before you can pay off your agreement, you’ll need to obtain a settlement figure from your lender. The settlement figure will tell you exactly how much you owe and will include the remaining balance, any interest, and any early settlement fees. 

Is Voluntary Termination and Early Settlement the same?  

No, Early Settlement and Voluntary Termination aren’t the same thing. Early settlement is when you choose to pay off the remaining balance of your car finance agreement to take ownership of the car. Voluntary termination, on the other hand, is a way to hand back the car and end the agreement early. If you’ve paid more than 50% of your total amount payable, you’ll have the legal right to hand the car back to the dealer, under the Consumer Credit Act. If you’ve not paid back 50% yet, you’ll need to pay the difference before you can hand the car back. 

Find out more about voluntary termination. 

If you’ve sorted your car finance through Refused Car Finance and aren’t sure who your finance lender is, just reach out to us with your Full Name, Date of Birth and Postcode, and we’ll be able to help!

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