Overpayment/Additional Payment

Meaning and Definition

Overpayment or additional payment refers to paying more than the required monthly payment or the agreed-upon amount towards a car finance agreement. It involves making extra payments towards the outstanding balance of the loan or finance agreement. Overpayments can be a deliberate effort by the borrower to reduce the loan term, decrease interest charges, or settle the loan earlier than the agreed-upon term.

Why it is important to know

Understanding the concept of overpayment or additional payment is important for borrowers who wish to manage their car finance effectively and potentially save money on interest charges. By making additional payments, borrowers can reduce the outstanding balance of the loan, which can lead to shorter loan terms or lower overall interest costs. However, it is essential for borrowers to review their car finance agreement and understand any specific terms or restrictions related to overpayments, such as potential fees or limits on the amount and frequency of overpayments.

Example in car finance

Suppose a borrower has a car finance agreement with a monthly payment of £300 for five years. However, the borrower decides to make an overpayment of £100 each month towards the loan. By consistently making the additional £100 payment, the borrower reduces the outstanding balance at a faster rate, potentially shortening the loan term and saving on interest charges. It is advisable for borrowers to check with their lender to ensure that the additional payments are applied correctly and to understand the impact on the loan term and overall interest costs.