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Published 20 July 2021
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Should I Pay Off My Car Finance Early?

Paying off your car finance early could save you money on interest and means you can own your vehicle outright. However, there are some factors you need to consider, including early repayment charges and whether you can afford it, before making your decision.

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When you’re paying your car finance every month, you might be thinking of all the other things you could be spending that money on.

Because of this, paying off your car finance early and not needing to make these monthly payments can seem an appealing proposition. However, there are some things you need to be aware of before you decide to repay it early, as it may not make sense for everybody.

Learn more about when it might be worth paying off your car finance early, and how to pay it off if you decide to go ahead with it.

When is it worth paying off my car finance early?

Paying off your car finance early can save you money on interest, but it won’t always be the best decision. It could be worth paying off your finance early if:

  • Paying the settlement figure to clear your finance is cheaper than continuing with your repayments.
  • You want to own the car outright. When you finance a car through hire purchase or PCP, you won’t own the car until you make all your payments, so paying it off early means you own it sooner. You can then carry on driving it without making payments, or you could choose to sell your car.
  • You can afford to pay a lump sum to settle your finance. Make sure you can pay the settlement figure and still have enough money saved in your emergency fund to cover any unexpected expenses. If you use all your savings to pay off your finance, you may find yourself needing to borrow money at a higher interest rate to cover any future emergency expenses.

Instead of paying off your finance in full, you may be able to make overpayments which will help you to clear your debt quicker. Contact your provider to see if you can do this, and also check if you would need to pay any extra charges to do so.

What things should I be aware of?

Before deciding whether to pay off your finance early, make sure you consider the following:

  • Are there any early repayment fees? Most lenders will charge some early repayment fees, so you should make sure that paying off your finance early would still be cheaper than continuing with your repayments.
  • Are you in negative equity? If your settlement figure is worth more than the value of your car, it might be worth continuing with your payments until you’re in positive equity or considering a different option.
  • How close are you to the end of your finance term? If you’re near the end of your agreement, it may be cheaper to continue making your repayments after you factor in any early repayment fees.
  • Will you want the option to return your car? If you have a hire purchase or PCP agreement, you can return your car at the end of the contract. Also, you are entitled to cancel your contract and return your car through voluntary termination if you have repaid more than 50% of your finance. However, if you pay off your finance early, you won’t have the option of returning your car.

How can I pay off my car finance early?

To pay off your finance early, you’ll need to contact your provider to ask them for a settlement figure. This is the amount you’ll need to pay to clear your finance and will include any early repayment fees. These fees will be set by the lender and will depend on how much you owe.

As well as the outstanding capital, the lender can charge you the lowest of:

  • The remaining interest.
  • 1% of the outstanding amount you need to repay.
  • If there are less than 12 months left on your contract, 0.5% of the amount left to repay.

However, if your outstanding finance is £8,000 or under and you want to repay it, you shouldn’t need to pay any extra fees to settle this amount.

Double check that paying off the settlement figure will be cheaper than continuing to make your monthly repayments.

When you have the settlement figure and you’re sure you want to proceed, you will need to pay it within 28 days. If you change your mind about clearing your finance early, you can continue with your repayments as normal.

Should I pay off my car finance or refinance?

There are many reasons why you might consider paying off your car finance before the end of your agreement, but you need to be confident that you can definitely afford to pay out the required amount. If you’re not sure, it’s worth carrying on with your payments or seeing if an alternative option, such as refinancing, could be more suitable.

If your credit score is good, you may be able to refinance your car loan to a new agreement with a lower interest rate. Check what rates you are eligible for before you apply to refinance. If you can get a better rate, you could choose a term that suits you, while making sure your monthly payments are an amount you can afford.

There is also the option of taking out a personal loan to pay off your car finance. You could use the loan to pay your settlement figure, which would then make you the legal owner of the car. You would then need to make your loan repayments each month and there would be no option to return the car.

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