How can I reduce my car finance payments?
Overpay
If you already have car finance, you might be able to reduce your payments by overpaying. If you find that you have disposable income available, you could check your finance agreement to see if it allows you to overpay and reduce the outstanding balance. Some lenders may charge an additional fee for making overpayments or ending an agreement early, however.
Buy a used car
All cars, apart from vintage and rare collectible vehicles, lose value – or depreciate – over time. This isn’t an exact science, and the rate of depreciation isn’t fixed, but typically, brand-new cars depreciate the quickest. Different cars lose value faster than others, but a new car could lose up to 50% of its original value in the first three years. This means that a used car could represent a great deal – even nearly new cars that are only one or two years old could be much cheaper than buying one that’s just rolled off the factory floor.
Choosing a cheaper vehicle could mean you need to borrow less and will have lower car finance repayments whether you have a hire purchase (HP) or personal contract purchase (PCP) agreement.
Shop around
The world of car finance has changed a lot over the years and borrowers now have many more options available than they did 20 years ago. There’s no reason why you need to take finance from the dealership or accept the first offer you receive. Depending on your individual circumstances, you might be able to secure a better deal with a lower APR and lower repayments elsewhere.
Taking the time to compare deals could help you make the right decision for you. You might also want to consider working with a car finance broker that has access to a wide panel of different lenders.
Extend loan length
Whether you’re looking to take out a new car loan or need to reduce your monthly repayments in your existing agreement, you might be able to extend the length of your loan. You may want to talk to your lender to understand the options available. Typically, the longer the loan term, the lower your monthly repayments will be. However, keep in mind that you’ll need to continue paying interest throughout your agreement and so may end up paying more overall over a longer term.
Choose a different type of car finance
There are several different types of car finance available, including HP, PCP, personal loans, and leasing. HP car finance and personal loans tend to have higher monthly repayments than other types of loans, as they lead to car ownership and ask you to borrow the full purchase price of the car. With a lease, you’ll never own the car and so your monthly payments may be lower. PCP can also offer lower loan repayments as you’ll only need to borrow the amount of value the lender believes your car will lose over your loan term, rather than the full purchase price. You’ll also have options at the end of your agreement and don’t necessarily have to buy the car.
Put a larger deposit down
While no-deposit car loans are available, putting down a large deposit upfront could reduce the amount you need to borrow. The less you borrow, the lower your monthly repayments might be. The typical deposit is 10% of the car’s purchase price, but if you can afford to put down more, you might be able to save money over time, choose a shorter loan term, or have more manageable repayments.
What is car refinancing?
Car refinancing is the term used to describe taking out a new finance agreement to pay off the outstanding balance on an existing car finance deal. This allows you to switch your car finance but keep your car by seeking terms that are better suited to your needs, such as lower monthly repayments. Typically, your current vehicle will serve as collateral and your new loan will be secured against it.
You don’t have to refinance with a different lender, but this is often the case, and the new lender will usually pay off your existing finance on your behalf as part of your contract with them. You can refinance at any time during your car loan term, no matter whether you have a hire purchase (HP) or personal contract purchase (PCP) agreement.
How can I improve my credit score?
The better your credit score, the better the rate of interest (APR) you may be able to get on your finance deal. If yours is less-than-ideal, the good news is that credit scores aren’t fixed, and you can take steps to improve them over time.
- Register on the electoral roll – head online to register for free every time you move house.
- Pay your bills on time – consider setting up a direct debit after payday to reduce the chance of paying late.
- Check for mistakes on your credit report – regularly looking at your credit report can help you spot unusual activity or incorrect details.
- Don’t use all the available credit – using a smaller percentage of your total credit (ideally no more than around 25%) and not maxing out your credit cards could boost your score.
- Don’t apply to several lenders at once – several hard credit searches in a short time could harm your score.
- Check your financial links – joint credit cards or mortgages could mean someone else’s credit profile is affecting your creditworthiness.
Should I apply for guarantor car finance?
A guarantor loan is a type of finance that is sometimes available to people who struggle to be approved for a loan on their own or only qualify for finance with a high interest rate. It’s like other types of car finance in that you can use the loan to split the cost of a new or used car into manageable monthly repayments, but unlike standard agreements, there’s a third-party guarantor involved.
The guarantor, typically a close friend or family member, must agree to make payments on your behalf if you fall behind. This reduces the risk to the lender, as they know that the loan will probably be repaid, even if the borrower doesn’t have a strong credit score or any credit history at all. This extra reassurance may help you secure a loan or qualify for a better APR with lower repayments.
What can I do if I’m struggling to pay my car finance?
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 qualify for voluntary termination only after you’ve paid 50% of the total finance amount. This shouldn’t be confused with 50% of your car’s value or scheduled repayments, as 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.
You might consider voluntary termination 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. While you’ll no longer have your car, you may wish to exit early rather than fall into arrears and damage your credit score.
Can I sell a car with outstanding finance?
The short answer is no, you can’t sell a car on finance. No matter whether you have a hire purchase (HP) loan or a personal contract purchase (PCP) agreement, the lender will remain the legal owner of your car until you reach the end of the loan term (and have paid the one-off balloon payment with PCP).
If you’re struggling to keep up with your repayments and try to sell a car that you don’t own, you will be breaking the law and could face prosecution. But don’t worry, if your circumstances change and you do need to sell a car on finance before the end of your loan, there may be options.
Before you can sell a car on finance, you’ll need to settle the loan with your finance provider. The first step is to contact them and request a settlement figure. This will be the amount you’ll need to pay to end your finance agreement early and take ownership of the car. If you’re able to pay this amount, plus any early repayment and administration fees that may apply, you will become the car’s legal owner. And as its owner, you’ll be free to sell it.
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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.
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