Paying off your car finance early

Whether you're in a PCP or a hire purchase deal, paying off your car loan early probably won't come cheap. But if you can afford it, you might save on interest.

There could be a number of reasons for wanting to end your car loan agreement early. You might no longer need your car, for instance, or maybe the cost of your monthly payments has become too expensive. But before you do anything, you’ll have to figure out if it’s really the best option for your finances. To begin with, here’s a little compendium on what you can expect if you decide to go through with it.

Should I pay off my car loan early?

Yes, no, maybe? Well, it can depend on a number of factors. You can start by thinking about the following:

  • How much it will cost. In most cases, you’ll need a solid chunk of money to pay off the loan early, so the first step is figuring out if you can afford to spend that much in one go.
  • How much you can save in the long run. This largely depends on the interest rate you were offered when you negotiated the loan and on the settlement figure you’ll have to pay your lender to walk away.
  • The reason why you want to change the car. If things get really expensive, you should consider whether it’s worth it. If you’re changing the car because you don’t like it anymore, maybe you can hold on for another couple of years until the loan comes to its natural end. Conversely, if the car is now way too small or too big for your needs, it may be worth the investment.
  • How much your car is worth. Are you going to pay more or less than it cost? Will you be able to sell it afterwards?

Ending personal contract purchase (PCP) early

You have 2 main ways of getting out of a PCP deal:

Ending PCP through “voluntary termination”

This can be a solution if you can’t afford the payments anymore and can do without the car. It allows you to return the car and walk away without paying any extras – although you also won’t get anything back.

However, you’re only legally entitled to this if you’ve already paid off half the overall cost (which includes the car value plus interest and fees). This clause can be a lifesaver if you’re experiencing financial difficulties, but unfortunately, it doesn’t apply in a lot of cases. Because of the way PCPs are structured (with a fairly big balloon payment at the end if you want to keep the car), you’ll usually only have paid off half the overall cost towards the end of your loan.

Voluntary termination and returning the car is also a better option if the car has depreciated more than expected and you don’t want it anymore. That’s because if you pay off the whole sum early instead, you’ll end up becoming the owner of a car worth less than you’ve paid for.

Paying off PCP early

If you have quite a chunk of money to invest in this, it’s a viable option. You can get in touch with your finance company and ask for a settlement figure to terminate your loan. 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’d have paid if you continued the loan. You’ll also need to cover the balloon payment.

Once you’ve paid the whole sum, you’ll become the owner of the car. You can then:

  • Sell it. If it doesn’t suit your needs anymore or it’s worth more than you’ve paid for it.
  • Keep it. If you still want the car or can’t get a good deal by selling it.

Ending hire purchase (HP) early

With HP, your options are similar to what you can do to end a PCP deal.

Ending HP through “voluntary termination”

Just like with PCP, you can return the car and walk away without paying anything more if you’ve already covered at least half of the overall cost.

The main difference is that HP doesn’t entail a balloon payment and comes with higher monthly payments, so you’ll usually reach that point earlier. Moreover, with HP, you borrow more money than with PCP. So, if you return the car early, you’ll save more on interest.

However, keep in mind that if you’ve already paid back more than half of the car’s value (which is more likely to happen with HP), you won’t be entitled to compensation.

If you haven’t paid off at least half of the loan before you want to end the contract, there’s also the option to pay what’s remaining of the 50% and return the vehicle.

Paying off HP early

Similarly, if you have a lump sum to invest, you can pay off your HP and become the owner of the car. Your settlement figure will be the outstanding amount of the loan plus a fee, although this can’t be charged if you’re only making an early repayment of £8,000 or less. If you’re 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.

If the lower of the 2 is the remaining interest, you won’t have saved any money by paying off the loan early. Like with PCP, once your debt is settled and you’ve effectively bought the car, you can either keep it or resell it, depending on its value and your needs.

Typical scenario

  • Clara has just moved to London with her boyfriend Tom. Now that they both use public transport to reach their respective workplaces, they really don’t need a car each, so they’ve decided to give Clara’s car back.
  • Clara purchased her car on HP 2 years ago. It cost £15,000, she gave a £2,000 deposit and spread out the remaining £13,000 over 4 years. She got a 6% APR deal, meaning that her loan is costing her a total of £14,654.66 (48 monthly payments of £305.31 each).
  • After 24 months, she has paid off: £7,327.44 (loan) + £2,000 (deposit) = £9,327.44. That’s more than half of the overall cost, which is: £16,654.66 / 2 = £8,327.33. They still decide to return it.
  • They’ve saved £7,327.44, which Clara would have had to pay back in the following 2 years. On the other hand, she would have owned the car in the end. By then, it could still have been worth more than that amount, in which case, they’d have lost some money. However, also considering the cost of car insurance, parking and ongoing maintenance, they’re confident they’ve made the right choice and saved money in the long run.

Dos and don’ts

Dos

  • Send a letter to your lender if you want to return the car. Be very clear that you want to proceed with a voluntary termination, and you’re not defaulting on your loan. And always keep copies, just in case.
  • Consider the condition of your car before returning it. A certain level of wear is expected, but if there are bigger scratches or other damaged parts, it may be worth having them repaired before giving the car back, or you may be charged an extra fee.
  • See if you can renegotiate your loan terms. If you’re experiencing financial difficulties, terminating the agreement may not be the only solution. It’s worth contacting your lender first and seeing if you can agree on a longer repayment plan. It may be more expensive in the long run, but it could help you out by still allowing you to keep the car.

Don’ts

  • Try to sell the car before you actually can. You may think you can sell the car and then use the money to pay off the loan, but unfortunately, that’s not how it works. Both with HP and PCP, you don’t own the car until your debt has been paid off, so you can’t sell it before then.
  • Purchase the car without considering its market value. If you want to pay off the loan and then sell the car to purchase another one, make sure you know how much your car is now worth, or you may end up losing more money than you expect.

Pros and cons of repaying your car loan early

Pros

  • You might save money. Repaying your car loan early could save you money in the long run.
  • You’ll have cleared your debt. This could be particularly beneficial if you need to apply for new credit, such as a mortgage.
  • You could own your car sooner. As long as you’ve met the requirements, paying off the loan early could help you become the owner of the car faster.

Cons

  • Early repayment fees. Depending on your deal, you might have to pay an early repayment charge.
  • Negative equity. If you want to pay off the loan early so you can sell the car, you could lose out if the remaining amount you need to repay is more than the amount you’d get for selling your car.
  • You might not save money. It’s important to double-check whether paying off your loan early will be cheaper than continuing to make your monthly repayments.

Things you should be aware of

Before choosing to end your car finance agreement early, you should keep the following in mind:

  • How often are you using voluntary termination? Using voluntary termination to end your agreement early will show up on your credit file. This won’t directly affect your credit score, and there will be no record of why you ended the agreement. However, if you use this method regularly, this can look bad to car finance companies. Lenders tend to be wary of people who often use voluntary termination to end an agreement, as it can be costly for them.
  • Are you applying for another car finance agreement? If you end an agreement and apply for another one, another credit check will be carried out, which can affect your credit score.
  • Are there early repayment fees? It’s important to work out how much these will cost you to check whether it’s definitely cheaper to pay off the loan early rather than continuing with your repayments.
  • How close are you to the end of your agreement? If you’re near the end, it could be cheaper to continue to make your monthly repayments rather than repay the loan early and pay an early repayment charge.
  • Are you in negative equity? If the remaining amount you need to repay is more than the value of your car, this is known as negative equity, and you’re probably better off continuing with your repayments.

When is the best time to end your finance deal?

Some sensible reasons for repaying your finance deal early include:

  • You have the money to pay off the loan early and want to reduce your monthly outgoings.
  • Paying off the loan early will be cheaper than continuing with your repayments.
  • The value of the car is higher than the remaining balance – in this case, it could make sense to pay off the settlement figure and sell the car.
  • You want to own the car outright.

How to pay off your car loan early

There are a number of different ways to pay off your car loan early. These include:

  • Increase your monthly repayments. If you can afford to, ask your finance company if you could make 2 payments a month, as this will help you clear the debt faster and save you interest.
  • Make a one-off larger payment. If you can’t increase your payments regularly, consider paying a larger lump sum every time you can afford to.
  • Refinance your loan. If you have a good credit score, you might be able to refinance your car loan to a cheaper rate of interest and/or a shorter term.

Bottom line

There are a number of reasons why it can make sense to pay off your car finance early, but it’s important to factor in early repayment charges and consider whether it will definitely save you money in the long run before you commit.

Finder survey: What aspects of car finance would matter most to you when choosing it?

Response55+45-5435-4425-3416-24
I would not choose car finance39.89%28.65%18.64%13.04%3.88%
Monthly cost29.64%23.98%32.2%34.78%20.39%
Interest rate23.82%22.81%28.39%27.95%22.33%
Overall cost23.27%19.88%23.31%25.47%21.36%
Level of deposit required13.3%11.7%20.34%19.88%15.53%
Flexibility on repayments11.08%16.37%12.71%19.88%19.42%
Don't know8.86%13.45%13.98%11.18%21.36%
Customer service8.31%7.6%10.59%16.77%18.45%
Whether there's an arrangement fee8.31%7.6%11.86%11.8%10.68%
Level of early repayment charges8.03%9.36%10.59%11.8%11.65%
Provider reputation6.37%10.53%7.63%14.29%11.65%
Source: Finder survey by Censuswide of 1032 Brits, December 2023
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