There are many reasons why people consider paying off their car finance early. But whether you are eligible to do so depends on your personal circumstances, as well as the details of your car finance agreement.
You should expect to pay a settlement fee if you opt for early repayment of your car loan. As such, whether or not early repayment is worth it will vary from person to person, but you do need to think hard about whether you can afford to do so.
What is an ERC?
An ERC (early repayment charge, also known as a settlement figure or resettlement fee) is a penalty charge that you’ll likely have to make if you opt for early repayment of your car loan. This charge typically amounts to two months’ worth of interest, depending on your lender. Whether or not your car finance lender will charge you an ERC, depends on their policies and the type of car finance agreement you have.
Before you decide on an early repayment, it’s essential to know whether you may be liable to pay an ERC, so check with your finance provider first. Once you’ve asked them for this figure, you usually have around 28 days to decide if you want to proceed with the early repayment of your car loan.
How does car loan early repayment impact your credit score?
You may think that making an early repayment of your car loan would improve your credit score, but this isn’t necessarily the case.
If you pay off your car loan early, the account will show as closed within your credit report. It’s only open accounts that have an impact on your credit score, and other lenders sometimes like to see these accounts, so they can gauge how timely you are with repaying your debt. However, once your car finance account is closed, any benefit on your overall finance management won’t be evident on your credit report.
If you need your credit report to work in your favour – for example, if you’re applying for a mortgage or re-mortgaging – then you may be better off keeping your car finance open on your credit report.
Is it worth early repayment of a car loan?
Whether or not the early repayment of your car finance is worth it depends entirely on your situation and the terms of your agreement. You need to ask yourself whether you can truly afford the early repayment or settlement fees, and whether it might be beneficial to stay in the finance deal for the sake of your credit score.
Other factors to consider include whether you’re in negative equity. Essentially, if the settlement figure that you’ll have to make for early termination is higher than the value of the car, it’s probably worth waiting out your car finance term in full until you’re in positive equity.
Similarly, if you’re already close to the end of your finance term, it’s likely cheaper to stick to your current finance deal and finish all of your repayments, rather than face the settlement (ERC) fee.
Returning the vehicle
Another factor to consider if you’re on either HP or PCP finance is whether you want to return the car at the end of the finance term. Under the Consumer Credit Act of 1974, you can opt for ‘voluntary termination’ of the agreement, provided you’ve already paid half the cost of the car or will make up the difference between what you’ve paid and that number. However, if you do so, you won’t be able to return the car to the finance provider – you will be its legal owner.
This may be beneficial if the car’s value is higher than that of your remaining payments, as, once you’ve paid any settlement fee, you can then sell the car on and make a profit. But you may still be charged by your lender if you opt for voluntary termination. This amount is capped by law, but it’s still worth considering. Companies may also react badly to frequent voluntary terminations on your credit file, too.
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