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.

When should I end my finance deal early?

There are a few main reasons why you may want to exit your car finance deal early:

  • You’re struggling to meet the finance payment each month possibly due to a change of circumstances such as redundancy.
  • You believe you can reduce your costs by ending the deal early and buying a car a different way.
  • You no longer need the car.

If you’re struggling to make ends meet

If you’re struggling to meet household bills as well as your car payments, get free, confidential advice from a debt advice organisation or charity.

Exiting early is better than falling into arrears and damaging your credit score – which could make it significantly harder to get finance in the future and mean increased interest charges for the deals you can get.

Fair wear and tear and ending finance or leases early

When you’re ending agreements early, keep in mind that the condition of the vehicle is important. General wear and tear is acceptable but you’ll be charged for the repair costs of things like broken wing mirrors or larger scratches.

Check with your dealer to find out what is classed as fair wear and tear. You can also find out more about what counts as fair wear and tear online from BVRLA in their 2017 guide, or order a hard copy. Check your manufacturer’s guidelines for more information.

If you have damage that doesn’t count as wear and tear, it’s worth checking to see if you can get the car repaired by a reputable garage cheaply before returning it.

Here’s a summary of what else you need to know when settling car finance early.

Ending personal contract purchase (PCP) early

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’.

Be aware though that you won’t get anything back if you paid more than half the cost of the car.

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.

Early repayment

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’ll need to pay to get voluntary termination on the car finance.

You then have two choices:

  1. 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.
  2. 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.

Repaying a hire purchase (HP) agreement early

Top tip

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 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.

What to watch out for when ending PCP or HP early

If you use voluntary termination to end your agreement early, it’ll show up on your credit file. They’ll be no record of why the agreement was ended. It will make little or no difference to your overall credit score, so is a much better route to take than missing payments, which could have large impacts on your credit file, making it difficult to borrow money in the future.

Using voluntary termination frequently to return cars early can look bad on your credit file though. This is because it costs finance companies more to end agreements early.

Because companies lose money when you end agreements early, it means they’re often not very supportive when you want to get voluntary termination. They might want to make the process last as long as possible.

To avoid this, send them a letter explaining you’re applying for voluntary termination. You don’t need to sign documents or fill out termination packs. Citizens Adviceprovides a template letter for this.

You may also find the finance company wants to give you a penalty based on the mileage of your vehicle. This will be because you’ve done more miles than they expected. Legally they cannot charge you a penalty for this if you’ve taken reasonable care of the car. For more information read The Car Expert page.

Finally, always keep up the payments before applying for voluntary termination. If you’ve missed a payment, the finance company has more rights, and your credit file will reflect missed payments.

Ending a personal contract hire (PCH) early

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.

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 it to an agreement they’ve taken out.

Think you’ve been mis-sold payment protection insurance? Find out How to reclaim mis-sold payment protection insurance.

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