When should I end my car finance early?
Car finance agreements are designed to split the cost of buying a new car into manageable monthly repayments over a set time. Depending on the type of deal you choose, you could sign up for a loan term that lasts up to five years. And a lot can change in in that time. We might change jobs, start a family, or face rising living costs – all of which can lead to your car, or the finance attached to it, becoming unsuitable.
The good news is that no matter whether you chose a hire purchase (HP) or personal contract purchase (PCP) agreement, you’re not necessarily locked in for the full loan term.
If you no longer need your car, are struggling to make your repayment each month, or want to own the vehicle outright so that you can modify or sell it, you may want to end your car finance early.
Terms and conditions will apply – your finance agreement is a legally binding contract, after all – but you might decide that paying the settlement figure and exiting the loan early is the best option for you and your circumstances.
What should I be aware of when ending car finance early?
If you’re considering ending car finance early, there are a few things to keep in mind:
1. Early repayment fees
Depending on your loan’s terms and conditions, you might have to pay an early repayment fee in return for settling the finance early. This cost can vary, but if you’re approaching the end of your agreement, you might find that the interest you’d save by terminating early might not exceed the repayment fee. In this case, you may choose to wait until your term comes to its natural conclusion.
2. Negative equity
Every car loses value over time, but they don’t all lose value at the same speed. A host of factors can affect the rate of depreciation, including the car’s make and model, its age, condition, and mileage. However, if your car has already lost a large amount of its value, you might find yourself in negative equity with an outstanding balance that exceeds the amount the car is worth. If you’re in this situation, settling your finance early could lead you to lose money rather than make a saving.
3. Returning your car
There are several reasons why you might want to end your agreement early, but if you no longer need the vehicle, you’ll have different options available compared to someone who wants to buy and own their car.
Returning your car and walking away is one of the potential routes you can take at the end of a PCP agreement. However, if you don’t want to wait or have an HP agreement, you could opt for voluntary termination if you’ve already paid 50% or more of the total amount payable.
What is voluntary termination?
Under Section 99 of the Consumer Credit Act 1974, you have the legal right to voluntarily terminate your car finance agreement early. This law is in place to protect car finance customers who can’t afford their repayments and reassure lenders that borrowers can’t simply walk away from their commitment.
However, it’s not quite as simple as just handing the car back. You’ll only qualify for voluntary termination once you’ve paid 50% of the total finance amount. This shouldn’t be confused with 50% of your car’s value or scheduled repayments; instead, it includes any fees and interest - as well as the balloon payment if you have a PCP agreement.
If you’ve not yet reached this threshold, you can still choose to exercise your rights if you can pay the difference to make up the required amount. Unfortunately, if you opt for voluntary termination and have already paid more than 50% of the total amount payable, you won’t receive any money back. Voluntary termination might be the best choice for you if you’re finding it hard to keep up with your repayments, you no longer need access to the car, or its value has already depreciated substantially.
Will voluntary termination affect my credit score?
While voluntary termination will be noted on your credit report, it shouldn’t affect your credit score. Your credit report won’t include why the agreement was terminated and it’s likely to be much less harmful to your overall creditworthiness than repeatedly missing payments.
Even so, finance providers can be wary of applicants who have exercised their right to voluntary termination several times, as ending an agreement early can be costly to lenders and cause them to make a loss when selling the car at auction. This could make it more difficult for you to secure a car loan in the future.
If you’d like to opt for voluntary termination, you should contact your lender directly to let them know. They might also ask you to confirm your choice in writing, either by letter or email.
What’s the difference between voluntary termination and voluntary surrender?
Voluntary surrender is quite similar to voluntary termination but is typically used by those who are in severe financial difficulty and unable to make any more repayments- and it can affect your credit score.
If you’ve not reached the 50% threshold required for voluntary termination and can’t pay the outstanding difference, you could enter a voluntary surrender agreement instead. In this case, you’ll return the car to the lender, and they’ll sell it at auction. If the sale amount is more than the finance owed, you won’t have to make any more payments and can simply walk away. However, if the amount generated isn’t enough to pay off the outstanding balance, you’ll still owe this to the lender and might have to pay the remaining amount in instalments.
What is a settlement figure?
The settlement figure is the amount you’ll need to pay to end your car finance agreement early and take ownership of the car. This figure will normally be made up of your outstanding finance plus any early repayment fees - minus any interest. You should be able to find this amount listed on your agreement paperwork or by contacting your lender directly.
Any figure quoted by the lender will be sent to you in writing and usually remain valid for 28 days. If you have the funds available to cover the settlement figure, you can simply pay the amount and become the car’s legal owner.
How can I end my PCP car finance agreement early?
With a PCP agreement, you have options at the end of your loan term: you can choose to return the car, own it by paying the balloon payment, or use any positive equity as a deposit in a new deal. As you won’t necessarily be working towards owning the car, you only need to borrow the difference between its current price and the amount the lender predicts it’ll be worth in the future – its GMFV (guaranteed minimum future value).
If you want to end a PCP car finance agreement early via voluntary termination, you’ll need to have paid at least 50% of the total amount payable. This will include the full balloon payment as well as any interest and fees.
Can I end a HP car finance agreement early?
An HP agreement typically involves putting down a deposit and then splitting the remaining cost of your new car into manageable monthly repayments for a term of between two and five years. Once you’ve finished making all your repayments and covered the ‘Option to Purchase’ admin fee, you’ll take ownership of the car.
It’s possible to end an HP car finance agreement early via voluntary termination in the same way as a PCP loan. However, as you won’t have a balloon payment to worry about, you’ll usually pass the 50% threshold approximately halfway through your loan term. You can also request – and pay – the settlement figure at any point during the agreement if you wish to end your finance early and keep the car.
What is fair wear and tear?
If you’ve decided to return your vehicle to the lender, its condition could make a difference. Generally, fair wear and tear won’t cause any issues, but any more serious repairs – for example, broken wing mirrors or extensive bodywork damage – could lead to additional charges.
What constitutes fair wear and tear isn’t an exact science and it can depend on the age of your vehicle and its mileage, but you might find that you’ll save money in the long run by getting the car checked over by a qualified mechanic before returning it.
Can I sell a car with outstanding finance?
It’s illegal to sell a vehicle with outstanding car finance. In fact, failing to settle your finance properly - and not disclosing this to the person buying your car - might even land you in court! Don’t forget that the lender remains the legal owner of the car until your finance agreement is settled and ownership has been transferred to your name.
How can I end a car finance agreement early?
No matter which option you’ve chosen to end your car finance agreement early, you should always contact your finance provider first. They’ll be able to share your settlement figure or grant you voluntary termination. Be prepared for them to ask you to confirm the request in writing.
If neither of these options is the right choice for you, speak to your lender about any other ways they could reduce the amount of interest owed. You may be able to overpay your monthly repayments to bring the agreement to an end early or apply for a refinance loan to increase your monthly repayments and shorten your loan term.
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