Can you pay off car finance early? Your options explained

Thinking about paying off your car finance early? Find out what you need to do and the facts you need to make a decision.



Are you wondering whether you can pay off your car finance early?

You're not alone. Many people end their car finance early, but whether it's a good idea for you depends on:

• Your car finance type
• How much you'll need to pay in fees
• Your current financial situation
• Whether you're in positive or negative equity

In this guide, we'll show you what to do and help you decide whether it's worth doing.

What is early settlement?

Want to settle your car finance early but also keep or sell your car? You'll need to go for the early settlement option.

The first step: get a settlement figure

If you want to pay off your car finance early, you'll need something called a "settlement figure". This is the exact amount you must pay your lender to fully repay your car loan.

You're legally entitled to request this figure at any time, and your lender must provide it within seven working days.

Settlement figures are generally valid for around 10 to 28 days. If you don't pay it off within that time, you'll need to request a new one. Make sure to check this with your provider.

Now, you might be thinking, "Why do I have to request a settlement figure? Can't I add up my remaining monthly payments to figure it out myself?"

The thing is, it's a little more complicated than that.

If you did that calculation, you'd be factoring in future interest that you no longer have to pay if you're clearing your balance early. So, the actual figure is likely lower.

However, you may need to pay an early settlement fee or option-to-purchase fee (or both). More on these below.

How to request a settlement figure

Most lenders have a mobile app or online portal where you can request a settlement figure. Take a look under sections like "My agreements" or "Manage my agreement".

Alternatively, you can always pick up the phone and call its customer service or financial support team. You should find the preferred number on your financial agreement or monthly statement.

Costs you need to know about

Here are a few costs that may be included in your settlement balance.

Early settlement fee

When you request your settlement balance, it will usually include an early settlement fee. This fee is usually based on 28 to 58 days of extra interest, depending on how long you still have left on your agreement. The maximum extra interest you can be charged is 58 days.

Generally, the less time you have left on your contract, the less interest you'll pay. 

Option-to-purchase fee

This fee is charged to legally transfer ownership of the car from the finance company to you. You'll encounter it at the end of your PCP or HP contract. It can cost anything from a token one pound to more than £200.

Balloon payments

This is the big payment you usually have to make at the end of a PCP finance contract if you want to keep your car. It's based on the guaranteed minimum future value (GMFV) of your car – the estimated value of your car when your contract ends.

Don't want the car or can't afford the payment? You can simply hand the car back. If you've stayed within your mileage limit and the car is in an acceptable condition for your lender, you won't have to pay anything else.

Another option is part-exchanging your car to use towards a new car on finance.

PCP finance includes this balloon payment to make your monthly payments much cheaper than standard loans.

Settlement figures for PCP vs HP agreements

Settling an HP agreement

Settling an HP agreement  means you'll own your car outright and can keep it or sell it on.

The settlement figure will likely include:

• The remaining balance (minus future interest)
• An early settlement fee
• An option-to-purchase fee
  
  

Settling a PCP agreement

Settling a PCP agreement doesn't automatically mean you own the car. You can choose to purchase the car by paying a balloon payment.

On top of the optional balloon payment, you'll likely have to pay:

• Your remaining balance (minus future interest)
• An early settlement fee

An option-to-purchase fee may also be included in your balloon payment.

Is it worth it financially?

For some people, it's absolutely worth it to end a car finance agreement. But equally, it doesn't make sense for others.

Here are some factors to consider so you can figure out which category you fall into.

How much money would you save?

Add up:

• Your remaining monthly payments
• Any fees
• The balloon payment (if applicable)
  
  

Now, compare that to your final settlement figure.

Would you pay more by seeing your contract out to the end than by paying the settlement figure? In that case, settling early could save you money.

Keep in mind that early settlement fees also apply, though. If the difference is small, the settlement fee could wipe it out.

Are you in positive or negative equity on your car finance?

Being in positive equity or negative equity can have a big influence on whether it's financially worth it to settle your agreement early.

• Positive equity means your car is worth more than your settlement figure. If you sell the car and clear the outstanding finance, you can keep the difference or put it towards another vehicle.

• Negative equity means your car is worth less than your settlement figure. You can still arrange to sell or part-exchange it, but you'll need to cover the shortfall to settle your finance. For example, if your car is worth £8,000 but your settlement figure is £9,000, you'll need to find another £1,000.
  
  

What are my other options?

In case early settlement doesn't make financial sense to you, here are two other options to consider.

Voluntary Termination

With most HP and PCP agreements, you have a legal right to end your agreement early and return the car to the finance company. This is called "voluntary termination".

Under the Consumer Credit Act 1974, you can generally do this without further finance repayments once you've paid at least 50% of the total amount payable under your agreement. For PCP, this includes the optional final balloon payment.

You can also terminate before reaching 50%, but you'll normally need to pay the difference.

You must have taken reasonable care of the car, and you may face additional charges for damage beyond fair wear and tear. Excess mileage charges can also be disputed, depending on your agreement and circumstances. Any outstanding arrears may still need to be paid.

Overpaying

Can't afford to settle fully right now? You can always ask your lender if you can overpay on your monthly payments. This may shorten your contract term or reduce the amount of interest you'll pay overall.

Can I pay off my personal contract hire (PCH) agreement early?

Yes, you can likely end your PCH agreement early. However, you won't be given the option to keep the car at the end as you would with a PCP or HP finance agreement.

Speak to your lender to see if they allow early termination or settlement options.

Zoomo is a car dealership specialising in cheap used cars in Newcastle. For more tips and advice, follow our blog or read our car finance guides.