Can I pay off my car finance early?

Your finance agreement is signed, you’ve started making payments, and you’re behind the wheel of your dream car – what more could you want, right?
 
Unfortunately, life can throw up unexpected challenges and what you hoped would be a smooth run can quickly turn into a bumpy road.
 
The good news is that, if your situation changes, you don’t have to be stuck with a car finance agreement that no longer suits your circumstances.
 
While conditions apply, it is possible to end your contract, whether it’s by paying off your car finance early or finding alternative ways to terminate ahead of the official end date.

When should I end my car finance early?

A car finance agreement is a serious commitment. It’s a legally binding contract that can last up to six years and you’ll likely be tied in to making fixed monthly repayments throughout that time. And a lot can change over the years, for good and for bad. You might start to struggle with your finances, need a bigger car to fit a growing family, or simply want a new car because you’re bored of your current one.

While you can’t simply walk away from a finance agreement, there are ways of ending it early. This might be the right option for you if:

• You’ve changed jobs, been made redundant, or are facing increased expenses that are making it difficult to keep up with your monthly car payment.
• You no longer need a car.
• You’ve had a windfall or promotion and think you might save money by ending your agreement early and paying less interest.
• You’ve had another child and now need a seven-seater or moved from the countryside into the city centre and need to swap your 4x4 for a supermini.
  
  

If any of these scenarios strike a chord, read on to explore your options:

Settlement figure

When you want to pay off your finance early and keep the car, you can choose to settle.

The first step is to request a settlement figure from your lender. This will usually be made up of the remaining outstanding loan amount minus any future interest that you won’t need to pay.

You can contact your lender directly or check your agreement documents to find out whether an early termination charge might also apply. 

Once you’ve received your settlement figure, you can choose to pay it all in one go or look to split the cost over time by refinancing with a new loan.

As soon as the settlement figure is paid, you’ll become the car’s legal owner – congratulations! Now it’s all yours, what happens next is up to you; you can sell it, trade it in for a new set of wheels, or add that new spoiler and set of alloys you’ve been dreaming about.

Voluntary Termination

If your budget is being stretched and you’re struggling to make your monthly repayments or you simply don’t need a car anymore, you can opt for voluntary termination.

This is a statutory right outlined in Section 99 of the Consumer Credit Act 1974 and lets you end your finance agreement and hand back your vehicle. You just need to tell the lender you want to voluntarily terminate and return the car. It is important to note you will need to pay 50% of the total amount payable (including the balloon payment in a PCP). If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money. Extra charges might apply if the car is damaged beyond fair wear and tear and it is important to note you will still be responsible for any arrears (missed payments) before the termination.  If you’ve already paid more than 50% of your agreement and still want to go ahead with voluntary termination, you’ll unfortunately not be eligible to get the difference back.

It’s also worth keeping in mind that the total amount repayable isn’t just your monthly repayments, but also any extra charges, admin fees, and the balloon payment in a PCP deal.

If you want to take this route, it’s best to let the lender know in writing.

Ending a Personal Contract Purchase (PCP) finance agreement early

Personal Contract Purchase – or PCP – contracts typically last between two and four years, but you can end the agreement early by settling your finance or choosing voluntary termination.

PCP is normally split into three steps: the initial deposit, monthly payments, and a final one-off balloon payment. Unlike other types of finance, you don’t have to borrow the full purchase price of the car; instead, your loan will cover the value that the lender expects the car to lose during your loan term.

This means that, not only will you have lower monthly repayments, but you’ll also have options at the end of the loan agreement. You can choose to buy the car by paying the remaining balance in a balloon payment (equivalent to the car’s estimated future value), hand it back and walk away, or use any available positive equity as a deposit in a new deal.

If you don’t want to wait – or can’t afford to – you can settle your PCP finance at any time.

Request a settlement figure from your lender. This will be the cost of your remaining monthly payments, minus any future interest. You’ll also need to cover the balloon payment to fully settle the finance and become your car’s legal owner.

Balloon payments can run into the thousands so, if you can’t cover it with your savings, don’t panic; refinance loans are available.

You also have the right to voluntarily terminate your PCP finance once you’ve paid 50% of the total amount repayable, including the balloon payment. If you haven’t yet met this threshold, you can make up the difference. Once your voluntary termination has been accepted by the lender, you can simply hand the car back and walk away.

More car finance guides

• How Can I Reduce My Monthly Car Payments?
• Can I Get Out of PCP Car Finance Early?
• How Does Personal Contract Purchase (PCP) Finance Work?
• What is Voluntary Termination?

Ending a Hire Purchase (HP) finance agreement early

Hire Purchase (HP) finance agreements can last up to six years, so it’s understandable that you might want to end the contract early if your circumstances have changed during that time.
 
With HP loans, you’ll typically pay a deposit upfront followed by fixed monthly repayments. Once all the payments are made (including the small Option to Purchase fee), you’ll become the car’s legal owner. The loan is secured against your car, so you won’t be allowed to modify or sell it until it’s officially all yours.

 
If you’d rather pay off your car finance early, you can request a settlement figure from your lender at any time. This will cover your remaining monthly repayments, minus any future interest. You can choose to pay this amount from your savings or with another form of finance.
 
An early repayment charge may be applied since where the amount of the early repayment exceeds £8,000, lenders are entitled to compensation for costs, provided that such repayment falls within a period for which the borrowing rate is fixed. The compensation cannot exceed 1% of the amount repaid early, or 0.5% if the outstanding period of the loan is less than one year.

These caps only apply if your early repayment is more than £8,000, or, where more than one early payment is made in a 12 month period, the total of those payments exceeds £8,000. No extra fees should be charged if your settlement figure is lower than this. 
 
If you don’t need your car or can’t afford to keep making payments, you could choose voluntary termination. You’ll need to hand the car back to the lender and be liable to pay 50% of the total amount repayable. If you haven’t yet repaid half of this total amount, you’ll be required to make up the difference. Keep in mind that extra charges might apply if the car is damaged beyond fair wear and tear, that means small scrapes and scuffs might be okay, but giant dents and missing wing mirrors could cost you!

What are the risks of ending a car finance agreement early?

As car finance is a legally binding contract, it’s probably unsurprising that breaking that contract early can come with complications.
 
Terms and conditions will apply, but there are other potential risks to keep in mind:

Problems getting finance in the future

While opting for voluntary termination shouldn’t impact your credit score, exercising this right will still be listed on your credit report and viewable by any potential lenders in the future.
 
Unfortunately, it costs finance companies more to end an agreement early, so if they see you’ve chosen to voluntarily terminate your finance agreement more than once in the past, they might be a bit more reluctant to offer you another loan.

Extra charges

With voluntary termination, you’re handing the car back to its legal owner – the lender – and they’ll then often try to sell it to recoup their costs. This means its condition will be under scrutiny.
 
Double-check your agreement to find out when extra charges might apply, but you could face penalty payments if the car is damaged beyond fair wear and tear, or it’s clocked up more miles than expected.
 
An early termination fee may also apply if you choose to settle the finance.

Negative equity

Negative equity might be a problem if you’re hoping to settle your car finance early so that you can use your car in a part-exchange for a new one.
 
Equity is the term used to describe the value held in your car; if the vehicle is worth less than the settlement figure, you’ll be in negative equity. This can happen if the car is more damaged than expected, has put in a lot of miles, or market conditions have accelerated the rate of depreciation.
 
In this case, you either won’t have any equity in the car to use as a deposit and so have to keep the car or sell it for a loss. If you go ahead with the trade-in, you’ll often need to make up the difference from your own pocket before the dealer agrees to the part-exchange.

How long will it take to settle my finance?

When it comes to settling your finance agreement early, you set the pace. Once you’ve requested your settlement figure from the lender, they should send this to you within 48 hours. The figure will then remain valid for between 14 and 28 days (although it will go down if you make a car payment in the meantime).

What is a fair wear and tear policy?

Fair wear and tear is all about the vehicle’s condition. With both PCP and HP finance, you won’t be the car’s legal owner during the loan term, so it makes sense that the lender would have a vested interest in the car’s condition. This is even more true when you’re ending your agreement early via voluntary termination.
 
Unfortunately, fair wear and tear can be subjective and dependent on your car’s age and mileage. Different lenders can have different fair wear and tear policies, but generally, worn upholstery and small scratches will fall until wear and tear and you will be charged for the repair cost of more substantial damage like broken headlights and large bumps.
 
Consider getting your car checked over by a mechanic before returning it so that you know exactly where you stand.