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Can I Repay My Car Finance Early?

Yes, you can repay your car finance early, but you need to check the terms of the agreement such as voluntary termination and settlement fees. Read our guide here.

Can I Repay My Car Finance Early?

Repaying your car finance early can be very useful if you have some disposable income and want to save on the overall interest. Equally, if you are having payment difficulties or no longer want the vehicle, it is important to know what options are available to repay early or close the account.

It is common to repay your car finance early to:

  • Save on the overall interest
  • Avoid going into arrears/payment difficulty
  • No longer want the vehicle and want to sell it on

However, car finance agreements can be very specific and depending on the type of car finance, there may be different terms that apply, as Quick Car Finance explains below.

Repay your car finance early to save on interest

One of the main advantages of repaying your car finance early is to save on overall interest. Whilst some people buy a car outright, more than 90% buy on finance and this means paying interest every month until the vehicle is yours outright (Hire Purchase) or you have the option of making a balloon payment (Personal Contract Purchase).

Similar to a mortgage, you can look at making an ‘over-repayment’ so if you have some disposable income, you can throw this into the mix to bring down the overall interest owed. This means that your vehicle’s car finance agreement will be open for less time and therefore you will save money.

You can contact your car dealership and ask about repaying early or overpaying in the following ways:

  • One large repayment
  • One large over-repayment, but not in full
  • Making two interest payments per month
  • Rounding up the existing rate to a round number or the nearest 50 or 100

Voluntary termination

Personal Contract Purchase (PCP) and Hire Purchase (HP) allow you to benefit from something called ‘voluntary termination’ which means that if you have paid more than half the original cost of the vehicle, you can walk away, hand back the vehicle and there is nothing more owed.

This is the perfect ‘get out of jail card’ for anyone who wants to get rid of the car and no longer wants it.

If you are still in negative equity, and this could be because you have had the vehicle for just a couple of months or less than half the time of the agreement, you would need to wait a little longer before making a voluntary termination.

In this case, you could simply ask your dealer for a ‘settlement valuation’ which is how much it would take to settle the plan.

Settlement fees

For Personal Contract Purchase (PCP), the settlement amount will include all the money you still owe, plus (in many cases) a fee to compensate the company for the interest you would have paid if you continued the loan.

Once you have paid the full sum, you can simply sell the car or keep it for your own personal use.

For Hire Purchase (HP), your settlement figure will be the outstanding amount of the loan plus a fee, which cannot be charged if you are only repaying early £8,000 or less. If you are repaying more, the fee is capped to the lower between:

  • 1% of the amount paid early (or 0.5% if you’ve entered the last 12 months of the loan).
  • The remaining interest.

Repaying early based on the type of car finance

  Must Be Out of Negative Equity Voluntary Termination Voluntary Termination
       
Personal Contract Purchase Yes Yes Yes
Hire Purchase Yes Yes Yes

 

Don’t forget wear and tear

Wear and tear is always expected with any vehicle, but if you are planning on giving the car back, you may be charged fees for any additional repairs.

In some cases, it may be worth having the repairs done before you give back the car.

Will repaying early affect my credit score?

No, neither repaying early or going into a voluntary termination will negatively impact your credit score. Certainly, if you are repaying your car finance early and it is on time, this is a good thing and it could boost your credit score.

The only thing to mention is that voluntary termination is recorded on your credit record – and whilst your score will not go up or down, if you make a regular habit of this, it will be picked up by future creditors as a warning sign and may impact your ability to access finance in the future.