Will a car dealer settle my finance?

When you finance a car, you take out a loan for anywhere between two and five years. But while you’re still paying off the finance on your existing car, you may be casting a casual eye on a newer one. Or you simply want to return the car early. Car dealers can help settle outstanding finance on the vehicle as part of the sales process, addressing questions about procedures, settlement figures, and the financial implications for the seller. If you think you have to wait until the end of your contract, that is not true - there is actually a way out of car finance.

In short, settling finance is possible. But there are a few things you’ll have to take care of first.

Understanding your finance contract

First, you need to make sure you understand every clause listed in the contract. It will help you decide if going to your car dealer is the right option and prepare you for the negotiations.

Return policy

Go through the finance terms to see whether returning the car is an option under your contract. You might be able to get the car back if you've paid less than 50% of the total credit. If you've paid more, meaning the outstanding credit is already less than 50%, you might not have the option to exit.

Voluntary termination

Your contract may have a voluntary termination clause. This would mean that you are allowed to return the car to the dealer without needing to pay extra. It will also depend on the amount of debt left: you're generally allowed to do it only if you've paid more than half of the finance loan; if you've paid less, this clause is unlikely to be of use.

Early exit

Since you will no longer pay interest as part of the car finance agreement, the lender will require compensation in the form of an early exit fee when settling car finance early. You’ll have to pay whatever the cheapest of the two is:

• 1% of outstanding finance
• 0.5% of total credit (if the car finance payment term is shorter than 12 months)

In cases when the is less than £8,000, you may be allowed to pay the outstanding interest.

Settlement terms

Reach out to the finance company or dealership, asking them to provide you with a car finance settlement figure. This figure includes the remaining loan amount, interest, fees, and potential early settlement charges. If you’re fine with paying this, move on to the next step.

Heading to the car dealership to settle

The next step is going to the dealership to discuss the early settlement with the car finance company.

Calculating equity

If you owe more on your current loan than the actual price of the vehicle, it is known as negative equity. Conversely, positive equity occurs when a car's worth exceeds the remaining debt on the finance. For example, if you owe £10,000, but the car is worth £8,000, you will need to pay £2,000 to cover negative equity.

Car finance with negative equity makes sense if you part-exchange your current car for another. The new loan will then be used to clear your debt and cover the cost of the new car.

Ending a finance deal early

For a smooth transition, go to the dealership with the loan settlement and your agreement reference number prepared. A finance settlement letter is crucial in this process, as it ensures the finance is legally settled before the sale can proceed. Ask the car dealership about the protocol and simply follow their instructions.

How long does it take to settle

When you first ask the car dealer for the settlement figure, the provider will get it to you within a few days (within 12 days at most). After that, you'll have a set period of 10 days to pay it off. After that, the settlement figure becomes invalid and needs to be recalculated.

The timeline after you've paid to settle depends on the car dealership.

Will the dealership pay off the loan balance?

Legally, the dealership is only obligated to offer the car’s trade-in is worth - actual cash value (ACV). Other than that, they don’t have to pay off the balance.

That said, if the vehicle has negative equity, the dealer may offer to cover the entire car finance balance. In scenarios involving a car finance plan, the dealer can assist in settling the outstanding finance of the current vehicle, detailing the financial calculations and implications involved. It is decided on a case-by-case basis.

Wrapping up

Early settlement of car finance has some conditions and costs attached to it. So, it’s important to weigh in the pros and cons before deciding to go for it. But if you’re struggling to make car payments, believe it will be a cost-effective decision, or simply don’t need this car anymore, now you can approach the dealership equipped with knowledge.

When it comes to selling your car while it is still under a finance agreement, there are several options available. Car dealers experienced in such transactions can settle any outstanding finance directly with the lender upon purchase, allowing you to receive the remaining balance. It is a legal requirement to clear the finance before completing the sale to another owner, making the process straightforward for those looking to sell their financed vehicle.

And finally, for those considering taking car finance, whether it’s after settlement or for the first time, you’re at the right place! If you want to take the hassle and stress out of obtaining finance, get a quick quote with Carplus. If you have any questions about it, send them our way too!