Cutting car finance costs
If you‘re struggling to meet your car finance payments, or simply want to cut costs, you can pay off the agreement early or return the car. But there are some conditions and costs attached to doing this, so don’t make a decision until you know exactly what they are.
Ending or repaying a leasing agreement early
There are two main types of car leasing arrangements – personal contract purchase (PCP) and personal contract hire (PCH). They have different conditions about early repayment or returning the car. Here’s a summary of what you need to know:
Personal contract purchase (PCP)
Returning the car
If you’ve already paid half the cost of the car, or make up the difference between what you’ve already paid and half of the car’s cost, you have the right to return the car to the finance provider under the Consumer Credit Act 1974.
This is called ‘voluntary termination’.
Returning the car might make sense if, for example, it had depreciated in value to the extent your remaining payments would add up to more than its current value.
But, if the car’s current value is more than your remaining payments, you might be better off paying a settlement figure to the finance company and then selling the car.
If you want to pay off your PCP agreement early, the first step is to ask the finance provider for a settlement figure.
This is the amount of money you will need to pay to end the agreement.
You then have two choices:
- Pay off the agreement and keep the car – this makes sense if the settlement figure is less than the cost of carrying on with your monthly payments.
- Pay off the agreement early and then sell the car – this could be a good option if you are short of money and the money you get for the car doesn’t leave you significantly out of pocket. But remember you can’t sell the car until you’ve paid the settlement figure, because until then you are not its legal owner.
Personal contract hire (PCH)
If you’ve been leasing a car through personal contract hire (PCH), you might have to pay off the leasing costs in full if you return the car early.
So think very carefully before cancelling the agreement and find out exactly what these total costs would be.
If you’re having problems paying the monthly leasing charge, talk to the finance provider.
They might offer to extend the length of the lease, which would lower your monthly payments, or come to some other arrangement to help you out.
Repaying an hire purchase (HP) agreement early
If you decide to return the car, tell the finance company by letter or email and keep a copy. Make very clear you’re returning the car and ending the agreement. If you don’t do this you could be seen to be defaulting on your payments, which could affect your credit rating.
With hire purchase (HP), you can return the car early if you’ve already paid for at least half of its cost or make up the difference between what you’ve already paid and half of its cost.
If you’ve already paid more than half the car’s cost, you won’t receive a refund of the difference.
The credit agreement you signed before taking the car should show its total price and what you’ll have to pay if you return the car.
Returning the car early can make sense if you no longer need it or could buy a comparable car elsewhere for less than your remaining payments would cost you.
Your rights when repaying HP early
The amount the lender can charge you for repaying an HP agreement early is capped by law.
This rule is part of the Consumer Credit Act and is on pages 6 and 7 of the Financial and Leasing Association leaflet on repaying your loan early. The Financial Leasing Association are the leading trade body for the asset, consumer and motor finance sector in the UK.
The most you can be expected to pay is the outstanding capital on what you borrowed (but not the interest) plus whichever is the lowest of these three amounts:
- 1% of the amount repaid early – for example £100 if you have an outstanding debt of £10,000.
- 0.5% of the amount repaid early if there are less than 12 months remaining – for example, £50 if you have a debt of £10,000.
- The remaining interest.
Bear in mind, if you’re repaying less than £8,000 early, you shouldn’t be charged any extra fees.
Using your savings
If the interest you’re earning on your savings is less than the interest you are paying on your car finance agreement, it makes sense to consider using your savings to repay the agreement early.
Make sure you’re not being charged for unnecessary insurance
Check your finance agreement to see whether payment protection insurance (PPI) has been added.
This insurance is to help you meet repayments if you’re ill or injured, and often if you’re made redundant too.
However, many people have been mis-sold payment protection insurance or don’t realise a finance company has added in an agreement they’ve taken out.
If you’re struggling to make ends meet
If you’re struggling to meet household bills as well as your car payments, you can get free, confidential advice from a debt advice organisation or charity.