Can you pay off car finance early?

Considering paying off your car finance early? This guide explains how you can go about it, and if it’s the right thing to do for you.

If you’ve bought your car on finance, you might assume you’re tied into the full contract – but that’s not always the case. Changes in life can bring changes to what matters financially. The good news? Paying off car finance early is often possible.

This guide breaks down how to pay off car finance early, whether you can settle car finance early, and helps you decide: is it worth paying off car finance early? If you’re thinking about it, here’s what you need to know.

Can you pay off car finance early?

Yes, you can usually pay off car finance early – but how you do it and whether it’s financially beneficial depends on the type of agreement you have.

Paying off your car finance could save you a significant amount in interest over time. But if you’re considering settling it while in negative equity, it might not be the best move.

Why pay off car finance early?

There are a few reasons why you may want to pay off your car finance early. These include:

• Saving on interest: The sooner you settle, the less interest you’ll pay over the life of the loan.
• Owning your car outright: Once paid off, the car is yours – no more monthly payments or lender restrictions.
• Improving cash flow: Freeing up your monthly budget lets you focus on other priorities such as savings or paying off higher-interest debt.
• Lowering debt levels: Reducing your overall debt can improve your credit profile and financial flexibility.
• Avoiding negative equity: Settling early can help prevent owing more than your car is worth.

How to pay off car finance early

If you’re thinking about paying off your car loan early, there are a few ways to do it:

• Make a lump-sum payment: Use savings or a windfall to pay off your loan. Request a payoff quote and pay by the “good through” date – the deadline the quote is valid until. Once processed, the title will be released.
• Increase your monthly payments: Add extra to your regular payments and apply it to the loan’s principal. Even small increases or occasional bonuses can reduce your balance faster and cut interest costs.
• Make more frequent payments: Split your monthly payment in two and pay every two weeks. This results in one extra payment per year, helping you pay off the loan sooner and save on interest.

Ending a Personal Contract Purchase (PCP) agreement early

Personal Contract Purchase (PCP) agreements are by far the most popular way to finance a new car. Typically, you’ll pay a deposit followed by monthly repayments over a fixed term, usually three or four years. These payments are primarily used to cover the depreciation of the car during that period.

At the end of the term, you have three options: you can return the car and walk away with nothing more to pay, as long as you’ve met the terms of the agreement; make the final balloon payment to own the car outright; or use any equity you’ve built up (if the car is worth more than the remaining finance, including the balloon payment) as a deposit toward a new car.

If you want to voluntarily terminate your PCP agreement early, there’s a key condition: you must have repaid at least 50% of the total finance amount. This includes your initial deposit, all monthly payments made, any interest, and the final balloon payment. It’s important to note that this 50% requirement isn’t based on the car’s value; rather, it’s based on the total amount of finance agreed upon at the start of the contract.

If you haven’t yet repaid 50%, you can still terminate the agreement early – but you’ll need to pay the difference. For instance, if your total finance amount is £30,000 and you’ve already repaid £10,000, you could end the contract by handing the car back and paying an additional £5,000.

Before deciding to end your PCP agreement early, it’s worth finding out if your car has positive equity. This is when your car is currently worth more than the outstanding finance you’ve left to pay (including the balloon payment). Also be aware any miles you’ve done above the agreed limit will incur additional charges, as will any damage to the car above normal wear and tear.

Once you know the value of your car, the next step is to request a settlement figure from your finance provider. This figure is the total amount needed to pay off the remaining balance and take full ownership of the car, leaving you free to either keep it or sell it on.

Ending a Hire Purchase (HP) agreement early

In a Hire Purchase (HP) agreement, your deposit and monthly repayments go toward paying off the car itself, rather than covering its depreciation, as is the case with a Personal Contract Purchase (PCP). There’s no balloon payment at the end, but monthly repayments tend to be higher than with PCP agreements.

Like a PCP, you must have repaid at least 50% of the total finance amount (including interest) before you can voluntarily terminate the HP agreement. However, unlike PCP, there is no optional balloon payment. Once you’ve made the final payment on an HP agreement, you legally own the car outright, which means you’ll likely reach the 50% repayment mark closer to the middle of your finance term compared to a PCP.

At that point, you can either request a settlement figure to pay off the remainder and take full ownership of the car, or you can choose to return the car to the finance company. If you haven’t reached the 50% mark, you can still end the agreement early by returning the car and paying the difference between what you’ve paid and the total finance amount.

If you return the car, be aware that excess mileage and condition charges may apply, similar to PCP finance, especially if the car has damage beyond normal wear and tear or exceeds the agreed mileage.

Is it worth paying off car finance early?

Your decision to end your car finance early will depend on your individual circumstances. If you no longer need the car or are struggling with monthly payments and have already paid off 50% or more of its value, it might be the right choice. However, if you’re facing financial difficulties and haven’t yet repaid 50%, it’s advisable to seek independent professional financial advice.

One option to consider is taking out a personal loan to pay off the remaining balance and reach the 50% mark. Keep in mind, though, that this will come with its own repayments, so it’s important to weigh this carefully.

Alternatively, you could explore specialist car refinancing options, which some banks offer, potentially lowering your monthly repayments.

When it’s worth considering paying car finance off early:

• The car’s value outweighs the remaining balance – this is known as positive equity.
• You no longer need your car.
• You’re looking to reduce your monthly outgoings and can afford to downgrade your car or go without one entirely.
• Your loan agreement doesn’t include a prepayment penalty.

When you should avoid paying car finance off early:

• You can’t afford to pay the remaining balance in cash.
• Your car is in negative equity and you want to sell it on.
• You have other high-interest debt.
• You’re planning to apply for credit soon.

Ending car finance early FAQs

What happens if you pay off car finance early?

Paying off your car loan early can reduce the total interest you pay, but watch out for any prepayment penalties. Check your loan agreement, weigh the potential fees, and reach out to your lender for exact steps and costs.

Does it hurt credit to pay off a car loan early?

Paying off your car loan early might cause a short-term dip in your credit score, but it usually rebounds within a few months. However, paying your car loan off early may not be the best use of your money if you have high-interest debt or your car loan has a low interest rate.

Is voluntary surrender the same as voluntary termination?

If you haven’t yet paid 50% of your total finance amount and you can’t afford to pay the difference, you are still able to end a finance agreement by what’s called a ‘voluntary surrender agreement’.

Unlike a voluntary termination, however, a voluntary surrender agreement doesn’t mean you no longer have to make any additional payments.

Under the terms of a voluntary surrender agreement, you’ll need to return the car to the dealer. Then, the finance company will sell the car at auction. If this sale covers all the outstanding finance, then you won’t have to make any more payments. If the sale doesn’t cover all the outstanding finance, you’ll need to pay the difference to the finance company.

You may also be charged for any additional fees, admin costs and any repair charges if the car is damaged beyond reasonable wear and tear.

Can I end my finance agreement early if I’ve had a crash?

If your car has been involved in a crash and written off, you won’t be able to end your agreement without paying the outstanding finance amount. However, you could look to use any insurance payouts (if applicable) to cover these costs.

Can I end a lease agreement early?

You can end a car lease agreement early, but this isn’t as simple as with HP or PCP. You’ll need to hand the car back, but your finance provider will often require you to pay an early termination fee, which could be as much as all your remaining monthly payments combined (plus interest).

Can I sell a car with outstanding finance?

To sell a car with outstanding finance, you’ll first need to settle the outstanding amount with your finance company by paying a settlement figure. It’s illegal to knowingly sell a car with outstanding finance to a private buyer without making them aware of this first.

You can choose to sell your car to a dealer – many of which will be able to pay the settlement amount directly to your finance company as part of the purchase.

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