Can I Repay My Car Loan Early?

If you find that you’re in a position to make a lump sum payment towards the end of your car finance agreement, are you able to settle the loan early? The simple answer is yes, though there could be a few things to look out for, in terms of settlement fees and voluntary termination. It’s a good idea to look carefully at your original contract, and see what this says about repaying the loan early.

Should you decide to settle your finance agreement early, or make an overpayment, we’ve looked at a few of the ramifications of doing this below, both positive and negative. It will be up to you to decide whether it’s the most suitable option for you.

Why Settle Your Car Finance Early?

Not everyone will be able to repay their vehicle loan early, but even if they can, some people may question the logic behind doing this. Settling early will mean making a large final payment. The thing to remember is that car finance is a form of credit, and it’s usually a good idea to repay credit as quickly as you’re comfortably able to. This will mean that you will be paying back less interest, and less money overall.

Other benefits of settling early include being able to easily sell the vehicle, if you no longer wish to keep it, and avoiding any potential payment difficulties later down the line. However, as mentioned above, there could be downsides to settling early, such as additional fees and charges.

Types of Overpayment

If you are looking to settle your car finance arrangement early, you don’t just have the option of making a large payment to purchase the vehicle outright. There are a few other ways in which you can complete the loan sooner than originally agreed. For instance, you could:

• Round up your monthly instalments, paying back more each month
• Make the equivalent of two payments per month
• Make a few large overpayments
• Make a final settlement payment

These options are often available for a mortgage too, and are encouraged in order to reduce the overall interest you’ll owe the lender. Essentially, the loan is open for less time, and you’ll therefore save money.

Car Finance Settlement Options

If you do decide to settle your loan early, not simply make an overpayment, there are two main choices – a settlement figure, and voluntary termination. We’ve explored these in more detail below:

Pay a Settlement Figure

With a settlement figure, the way this works will depend on the type of agreement. With some arrangements, the settlement figure will of course include the total outstanding, and will also involve a fee, to compensate for the interest you would have paid the lender. you will need to check your contract to see whether a fee is applicable.

With other deals, the money you currently owe the loan provider will be included in the settlement figure, but the fee may not be applicable. In such cases, if the total settlement amount is £8,000 or less, no fee can be applied. And if you are paying above this amount, the fee will either be a percentage of the amount you’ve repaid early (normally 0.5% or 1%), or the total remaining interest. Whichever of these two options is lower is the amount the fee will be capped to.

Voluntary Termination

With both HP and PCP, you can choose to go down the route of voluntary termination. This means that if you’ve paid more than half of the original purchase price of the vehicle, you have the option to simply hand back the keys and walk away. This can be a great choice if you decide you no longer want the car.

It’s important to note that being half way through your agreement won’t necessarily mean you have paid back half the amount due. If this is the case, you’ll still be in negative equity, and you may need to wait a little longer before you’re able to opt for voluntary termination. Alternatively, you can ask the lender for a settlement valuation, and make this payment before handing back the vehicle.

Can Settling Early Impact My Credit Score?

You don’t need to worry about affecting your credit rating when settling early. Even if you choose to proceed with a voluntary termination, which sounds like it could negatively impact your score, you can rest assured that your credit rating won’t be damaged. In fact, as you’re making an early payment, it may have the opposite effect, and boost your credit score!

The thing you do need to bear in mind is that a voluntary termination will be recorded on your credit file. So while it shouldn’t lower your credit rating, if there are several instances of voluntary termination on your credit report, finance providers may be less inclined to lend to you. Too many voluntary terminations can be seen as a warning sign that you’re not able to properly manage your finances.

Next Steps

Should you wish to settle your car loan early, the best thing to do is speak to your lender. They’ll be able to explore your options with you, and let you know if there are any additional fees you’d be charged if you choose to make a final lump sum payment. They should also be able to provide a definitive settlement figure, which will take into account what you’ve already paid, and the interest rate applied.

It’s important to carefully weigh up your options when settling a vehicle loan, as you don’t want to end up paying more in fees than you would have, had you continued with the agreement! Go through your contract and ensure that repaying early is the best choice for you both personally and financially.