Last updated: 23/07/2020 | Estimated Reading Time: 3 minutes
Paying off car finance early
Paying off your car finance early is only really possible if you’re in a comfortable position financially to do so. If you are lucky enough to be in such a position, then you could be doing yourself a massive favour. It means you’ll make big savings on the amount of interest you pay on your car finance deal. However, if you've got negative equity in your vehicle, then it might not be the best idea.
Assuming that your finance company allows you to pay off your car early then there are some tips that you can use in this guide to help cut down your payment period, thus saving you money on the interest. However, like many things, there can be catches to paying off your car loan early, so be careful.
In This Guide:
- Early repayment fees
- Negative equity
- Ways to pay off your loan sooner
- What if my finance provider charges precomputed interest?
Early repayment fees
Unfortunately, most finance companies operate with early repayment fees. If you’re in a position to pay off your car loan before you legally have to, then you’ll likely have to pay repayment fees, also known as resettlement fees. These fees normally amount to one or two months’ worth of interest that would have otherwise been gained. These fees vary from company to company however, so make sure you always check the rate as set out in your contract.
Another thing to look out for is negative equity. If you're planning to cancel your car finance plan so that you can sell or trade the car you got on finance, you'll need to be wary of this. If the remaining amount you'd need to pay off is less than the amount you'd get if you sold your car today, it might be worth waiting a bit before settling. Contact your finance provider to get a settlement valuation - this will tell you how much you need to pay off to settle the plan.
Ways to pay off your loan sooner
If the fact that you’ll probably have to pay a fee for paying off your car loan early hasn’t turned you off of the idea, then below are some tips on how you can settle your debt early.
Make More Payments a Month:
This may sound like an obvious one but it may be worth it if you can get your finance company to agree for you to pay two payments a month. No matter how long you’ve taken out your loan for you’ll be sure to pay it off sooner, saving you money on the interest.
Rounding up Your Payments:
If you can afford it, rounding up your monthly repayments can greatly benefit you. Rounding it up to the nearest £50 may not sound like much, but in the long run it’ll save you hundreds of pounds worth of interest.
Make an Extra Large Payment:
Obviously, you can’t do this constantly, and if you had large lump sums of money just lying around then you probably wouldn’t have needed a car loan in the first place. However, if you find yourself with a windfall, why not make a large one-off payment? It’ll certainly help wipe off a chunk of your debt, leaving you with less interest to pay.
Refinance Your Loan:
If you have a good credit score, it’s possible that you may be able to refinance your car loan. This means you’ll get a shorter loan with better rates of interest.
What if my finance provider charges precomputed interest?
Unfortunately, these tips might not work if your car finance deal uses precomputed interest, which means you pay the same amount of money no matter how early you pay the car off.
Although it can be hard to keep up, try not to miss any payments. If you miss a monthly repayment you’ll be faced with late fees, meaning it’ll take longer to pay off your loan.