Buying and running a car can be a costly affair, and for many people, car finance takes up a large chunk of their monthly income. This guide outlines the types of car finance available to motorists, and explains what to do if you want or need to either cut the cost of your finance, settle it early or even cancel it altogether.
Reducing car finance payments
If your car finance payments seem unaffordable, there are things you can do to reduce them, though all options should be considered and compared very carefully.
If your car purchase was financed via a loan, you could try to obtain a new loan at a more favourable rate of interest, and use this to pay off the original borrowing. This can be a realistic option if you have a good credit score and can get a better deal, but do work out what you’d be paying back overall using the old or new finance for comparison.
A cheaper car
Whether you are leasing, have a hire purchase or conditional sale agreement, or have taken out a loan, it could be cost effective to exchange your car for a cheaper model. This tactic very much depends on whether the finance company would agree to this and whether a new loan really would work out cheaper in the long term.
I can’t afford car finance
There are a few options that can help those who find it difficult to get car finance.
If you are a young driver who cannot get a good deal on car finance because of your lack of credit rating or age, then you may be able to access a better choice of deals if you can get another adult to act as your guarantor. They would become legally liable if you did not make the repayments.
If you cannot afford to buy a car, leasing may be a realistic alternative. There are many leasing packages on the market, often promoted as ‘just add fuel’ deals. You would never own the car, but you might be able to drive a new, reliable vehicle at a monthly cost you could afford.
How to settle car finance
If you have a lump sum behind you, you can ask your lender for a settlement figure to end the finance agreement. Otherwise, you could take out a new loan to cover this cost and then make the repayments on that instead. As mentioned earlier, with some finance packages, you may have to return the car as part of the settlement. There is one alternative option too.
If you could obtain a credit card with an initial no-interest period, you might be able to borrow on this to settle the finance, then pay back the money to the credit card company instead. This requires very careful consideration as you might end up paying more if you cannot pay the settlement amount back in full before the introductory rate expires. Some dealers or lenders either refuse to accept credit card payments or only allow a certain sum to be paid this way, so this is another point to check out before you go ahead.
How to get out of a car finance agreement
So you’ve signed up for the finance and are now driving your car. What happens next, though, if your circumstances change and you need - or want - to get out of your car finance agreement? Can you do this, and if so, how? The answer partly depends on what type of finance agreement you signed up to.
Personal Contract Hire
If you lease your car, you might be able to return it without owing any money. If you terminate your leasing contract early, you could still be liable for the total cost that would be due by the end. It’s best to speak to your lender, who can give advice and may be in a position to offer a more affordable package instead.
You may be able to return a car that is on hire purchase. Usually you need to have paid at least half of the car’s total price, or be able to settle the difference between what’s been paid and half the total. The original agreement should explain your options. This could be a viable option if you no longer need the car or can replace it for less than what the remaining payments would cost.
This kind of agreement may allow you to instigate voluntary termination of the contract if you have paid a minimum of half the total cost. There will be no refund if you have paid more than this, and of course you will not own the car as originally planned. If you wanted to pay off your finance early, you can request a ‘settlement figure’ from the lender.
Fixed sum or secured loan
If you have taken out a fixed sum loan, the lender has a claim on the car, because it is the asset upon which the loan was secured. It’s best to advise the finance provider if you need assistance, as you may be able to renegotiate, or you could look into securing a better loan from another lender to settle this one.
Personal or unsecured loan
With an unsecured loan, you should also contact the lender and see if you can reach a mutually agreeable alternative. Otherwise, if you can obtain a new loan from elsewhere, you could use this to pay off the original loan.
Can you cancel car finance?
As outlined above, it’s not as simple as cancelling the finance agreement as you may still owe the lender money - even if you hand back the car. There are various factors that come into play when cancelling car finance.
How much has been paid
Some agreements can be terminated if at least half of the full cost of the car finance package has been paid. You may not receive a refund if you have paid more than this. The length of your contract is important, because it determines what you have paid so far, as well as what sum would be due from this point on. With PCP agreements or loans, things might depend far more on what kind of deal - if any - your particular lender is willing to offer.
Type of finance
The type of contract you have also influences whether or not you can cancel your finance package. You cannot cancel hire purchase, for example, if you have not paid at least half of what you owe. With a lease agreement, meanwhile, you may not be able to simply return the car and owe no more. A car loan cannot be cancelled but either settled in full or transferred to a new loan agreement.
Can you pay off car finance early?
If you want to pay off your car finance earlier than planned, then there are steps you can take to achieve this.
What do you owe?
The first thing to look at is how much you owe. Bear in mind that extra fees and charges can apply.
You may then wish to request a settlement figure from your loan or finance provider. This is the total amount they would accept from you to end the contract without you owing any more. This may total the same as the monthly payments or it could be more or less. If early repayment fees apply, it could well be more, but the lender could also decide to charge less as you would owe less interest.
Can you keep the car?
The other point to consider is whether you would be able to keep the car. With an unsecured loan, this would definitely be the case, whereas with a leasing plan it would not. If you have a hire purchase or conditional sale agreement, you might keep the car if you could settle the finance. With a fixed sum or secured loan, you would have to settle up before you could keep the vehicle.
Mis-sold car finance
Were you misled?
If your car finance package has turned up some unpleasant surprises, then there is a chance you may have been mis-sold it in the first place. This might apply if your finance package was not explained clearly by the dealer at the outset. An example of this is if you take out a finance package that gives you the option to buy the car at the end, but the final or ‘balloon’ payment due is far more than you recall the dealer implying it would be.
What to do if your car finance was mis-sold
Dealers should strive to provide transparency when they sell a finance package. If you feel you have been misled, the first thing to do is gather any paperwork and evidence you have. Next, you should complain to the provider, who must reply within eight weeks. If they do not, or you disagree with their final answer, then you can contact the Financial Ombudsman Service within six months. They will conduct an independent investigation at no cost to you, which may help you to settle the dispute.