How to settle car finance early

Unless you are blessed with second sight or can borrow your grandma’s crystal ball it is impossible to predict the future and so, if you decide to pay off your car finance early you will not be alone. Unforeseen circumstances are the catalyst behind thousands upon thousands of early settlements each year across the country. In this article we will explore your options…

girl reading documentsThere are many good reasons that you may wish to settle your finance early. The average term for car finance is creeping up and in these days of easy credit it’s not uncommon for finance to be spread over four, five, six years or even more. It’s hardly surprising then, that early settlement stats are on the rise. Let’s face it, a lot can change in six years! That ultra-cool sports car which you bought after your first pay cheque landed, doesn’t seem quite so appealing with the ‘new arrival’ wedged into the woefully inadequate back seats.

Life very rarely offers a smooth trajectory upwards; there are normally quite a few ups and downs, bumps and bashes along the way. A new well paid job doesn’t always pan out; the new boss isn’t quite as easy to work with as the one who hired you. Before you know it, you are out of the door and lumbered with financing a car you cannot possible afford. Hardly an uncommon scenario.

And let’s be honest, it’s not just circumstance either; after a few years you might just want a change. You’ve had the frumpy MPV for a few years now and you keep eyeing up your neighbours Alfa wondering how you can engineer a change to something with a little bit more style. Or maybe, you have just grown-up and the bright orange hot hatch doesn’t quite fit the new executive image.

The bottom line is that thousands of British car owners will settle their car finance early each year for a myriad of different reasons. In order to understand your options, you must first understand the nature of your loan. If your car was financed with an unsecured loan from your bank you can sell the car and repay the loan whenever you like. But for most of us, who have taken out specialist car finance, usually a PCP or HP, our vehicle will be secured against the loan. In this situation we are not entitled to sell the car without the finance being settled first.

Early Settlement Options

So what are your options? First of all, let’s be clear, you are entitled to settle your finance whenever you like. If the car is worth more than the outstanding finance, it’s a relatively simple process. You contact your loan provider and ask for a settlement figure. This is the total that you owe, including early settlement charges. Once you have the settlement figure you can negotiate a sale of the car with a car dealer (or car buyer) who can settle the finance and pay you the balance due. You must, of course, tell the prospective buyer there is outstanding finance and provide him with a copy of the settlement terms.

Negative Equity

It’s more complicated if there is negative equity; that is, the outstanding finance is more than the value of the vehicle. This will generally be the case in the early years of a finance agreement particularly if no deposit was put down. If you have a good credit history, have disposable income and are ‘trading-up’, negative equity need not be a problem. Suppose you have accepted a new job offer with a pay rise but a long daily commute means you would like to exchange your baby Fiat for something larger. If faced with negative equity in these circumstances, there are finance companies who would, subject to affordability, be able to help you.

So, in summary the normal process, if you decide to settle car finance early is:

  1. Contact your finance provider and ask for a settlement figure
  2. Get a valuation on your vehicle (click here)
  3. Arrange new finance (if required)
  4. Sell the car (making the necessary financial adjustment depending on the value of the car in relation to the outstanding finance)
  5. Find a new car

Whatever your circumstances, particularly if you are faced with negative equity, you may need specialist help and we at can support you through this process. Call us on 0800 799 9180.

Voluntary Termination

The 1974 Consumer Credit Act provides consumers with an invaluable ‘get out of jail free card’. If you have regulated vehicle finance by way of either, a PCP or HP, you are entitled to terminate the agreement once you have paid 50% of the total amount payable. The idea behind voluntary termination (VT) is to protect consumers who can no longer afford the monthly payments associated with the loan.

Although this is your legal right it is not popular with finance companies as often it loses them money, as the value of the vehicle is less than the outstanding finance. Therefore, if you wish to voluntarily terminate your agreement you should do it by the book and do not necessarily expect fair play in return. You may run into problems if the car is damaged (even small dings and scratches) or you haven’t complied with servicing schedules. The finance company may well be looking for ways to re-coop their losses so don’t be surprised if you get stung with heavy charges in these circumstances.

The law is fairly vague about what is considered acceptable wear and tear and what is unacceptable and therefore, chargeable. If you have covered excess miles this does not give the finance provider a cart blanche to charge you extra. So, be reasonable but don’t be bullied. If you wish to VT and the car has cosmetic damage it may be worth your while getting it repaired in advance.

For more information about how to proceed with a VT or sample letters which you can use to send to finance companies please get in touch (0800 799 9180).

Terminating a Contract Hire Agreement

If your car is leased (contract hire) as opposed to financed, handing it back may be more difficult without paying very hefty penalty charges and will be subject to the terms and conditions of the lease. You should refer back to the documents you signed when you took the lease out. Although you may find extracting yourself early from a lease is expensive there is another option; depending on the terms and conditions of the lease you may be able to transfer your lease on to a third party.

There are a number of lease swap or lease transfer websites in the UK, some free (click here) and some with a fee (click here). Generally, you get what you pay for; the free sites offering a fairly basic service. To attract buyers, you can offer financial incentives such as two months rental free. Once you reach an agreement to sell in principal, you will need to contact your lease provider.

There almost certainly will be fees to pay when transferring a lease which the buyer may well expect you to pay for, so be prepared to negotiate. Of course the buyer will also be subject to a credit check before the transfer can be completed. You should check the small print carefully to ensure that once the transfer is complete your responsibility for the car and the payments are at an end.