1 July 2022
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. 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.
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.
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.
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.
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. You’ll have to pay whatever the cheapest of the two is:
In cases when the fee is less than £8,000, you may be allowed to pay the outstanding interest instead of the fee.
Reach out to the finance company, asking them to provide you with a settlement figure. This is how much you’ll need to pay to settle the finance deal. If you’re fine with paying this, move on to the next step.
The next step is going to the dealership to discuss the early settlement.
If you owe more on your current loan than the actual price of the vehicle, it is known as negative equity. 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.
For a smooth transition, go to the dealership with the loan settlement fee and your agreement reference number prepared. Ask the car dealership about the protocol and simply follow their instructions.
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.
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. It is decided on a case-by-case basis.
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.
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!