Can you pay car finance off early?

    Did you know that almost all new car sales in the UK are bought on finance, and nearly a fifth of used cars are too? 

    Financing agreements are be a great way to be able to drive the car you want, without paying the full cost upfront. However, they also add to your monthly bills and mean paying more than your vehicle’s asking price in the long term, thanks to interest rates.

    Whether you’re looking to trim interest costs or own your vehicle outright, paying off your car finance early can be a strategic move. Having your finance settled could boost the value of your car if and when you choose to sell, and you can even sell your car on finance too.

    What is car finance?

    cars parked
    Nearly half of all new cars, and one fifth of used cars, in the UK are bought on finance.

    Car finance is a popular means of purchasing a vehicle, allowing you to spread the total cost of the car over monthly payments. Financing can allow greater affordability, quicker availability, and a wider range of options when shopping for your next set of wheels. 

    Financing options

    In the UK, car financing typically comes in the form of Personal Contract Purchase (PCP) contracts or Hire Purchase (HP) contracts, each with distinct terms and conditions.

    PCP is the most popular financing option today, with around 80% of new cars, and a growing number of used vehicles, bought via PCP deals. PCP offers the best of both worlds between typically low-cost  car leasing and the more traditional hire-purchase method of buying something with equal, regular instalments.

    However, you do not pay equal instalments on a PCP contract; rather, you pay an initial deposit and then lower monthly car payments, with various options at the end of your agreement including: returning the car and ending the contract; paying a ‘balloon payment’ to gain full ownership of the car; trading the car in for a new one on a new lona; or selling your car to a dealer who will clear the remaining finance.

    HP finance is more straightforward. Lenders finance your purchase from a dealership or other car marketplace. You then buy your car with a deposit and pay off the outstanding balance in equal monthly instalments, with interest. Once the finance is fully settled, the car is yours to keep or sell as you see fit.

    What is a Guaranteed Future Minimum Value?

    someone signing a contract
    Most car finance contracts range from 12 to 48 months.

    When you enter into a PCP car financing agreement, your finance company guarantees what your car will be worth at the end of your payment period, regardless of its actual market value at that time. Taking into account factors such as mileage and condition, this predetermined, estimated cost is called your Guaranteed Minimum Future Value (GMFV).

    Also known as the Guaranteed Future Value, balloon payment, or optional final payment, your GMFV is contractually the lowest amount that your car will be worth at the end of your loan. 

    GMFV provides a degree of certainty for both buyers and finance companies. For the buyer, it indicates the car’s future value, allowing for easier budgeting. When your contract ends, you can “buy out” and keep your car by paying off the GMFV. For the finance provider, the GMFV helps mitigate the risk of depreciation and ensures the recuperation of funds at the end of the contract.

    However, the GMFV comes with strings attached. Buyers need to understand its terms and conditions, including mileage limits, maintenance requirements, and wear-and-tear charges.  

    It’s also crucial to consider that the GMFV may not accurately reflect the true market value of your car at the end of the contract term. If your vehicle is actually worth more than the GMFV, you can use the equity towards your next set of wheels. If it’s worth less, then you can just hand it back. 

    someone driving a vehicle
    The two most popular financing options are PCP and HP loans.

    Regardless of your car financing contract, it’s imperative that you follow your contract terms for making payments on time. Late or missing payments can jeopardise your financing altogether. 

    On the flip side, paying off your car finance early can help save on interest, gain ownership of your vehicle, and open avenues for a more flexible financial future.

    Positive and negative equity

    In the UK, most car financing agreements are arranged so that you are in ‘negative equity’ for at least half of the duration of your contract, meaning that the outstanding finance on your loan is greater than your car’s current market value. 

    While cars initially lose a lot of value, the depreciation rate usually slows over time. At this point your loan payments might catch up, and you’ll be in positive equity, meaning that your car’s value is worth more than the resettlement figure. 

    Negative equity complicates early car finance repayment, as settling your loan may require covering the shortfall between the outstanding loan amount and the depreciated vehicle value. Our dedicated negative equity guide examines the impact of this aspect of financing, helping you make informed decisions and mitigate potential financial setbacks when considering early repayment options.

    How fast can I pay off my car finance?

    a silver car coming onto the motorway
    Paying off your car finance early helps improve your financial freedom.  

    This depends on the timeframe of your loan agreement and your current financial situation. 

    Typically, finance company loans have terms ranging from 12 to 60 months. Early repayment may incur fees, so carefully evaluate your finance agreement and your monthly budget before changing your repayment plan. 

    Life changes such as job loss or unexpected expenses can also affect your ability to pay off a car finance deal early. Looking at the big picture is key. 

    What happens when I pay off my car finance?

    Paying off your car finance should be as easy as 1-2-3. However, be sure to read the fine print on your agreement before moving forward. 

    1. Contact your lender to discuss the process, potential fees, and any specific steps required for early settlement. 
    2. Confirm that the payment amount covers your entire outstanding balance.
    3. Make payment and obtain confirmation that your loan is fully settled, with no remaining obligations.

    Typically, you only pay your finance off early when you’re selling your car for a value higher than the GMFV in your financing contract. And that’s easier than it sounds – get an instant, free valuation today to see if your value is higher than what’s stated in your finance contract.

    Benefits to paying off car finance early

    ✅ Interests savings – Reduce overall interest paid on your vehicle, saving money in the long run. If your loan carries high interest rates, settling early can save significantly on interest.

    ✅ Own your car outright – Get full ownership sooner! If your circumstances change, and the current vehicle no longer meets your needs, early repayment allows flexibility in acquiring a new one.

    ✅ Improved financial freedom – Paying off your finance earlier reduces money stress and enhances long-term financial flexibility. Repayment can be a strategic move if your financial situation has improved, or if you anticipate major life events like buying a home as it can positively impact your credit report.

    ✅ Better future loan terms – Paying off your vehicle finance ahead of schedule shows financial responsibility and may improve your creditworthiness in future financial transactions.

    ✅ Resale or trade-in advantages – Positions you better for achieving a higher value when selling or trading in the vehicle. Some financial institutions also offer incentives or discounts for early repayment, making it financially prudent.

    Early repayment fees and loan termination

    a white car parked up
    Early car loan repayment may incur small fees depending on your agreement with your financial provider.

    You may incur early repayment fees, also known as early settlement charges, if you pay off your car finance before the agreed term. These fees compensate lenders for potential interest loss. Although their impact varies, understanding these fees is crucial to making informed financial decisions. It’s important to know whether you incur these fees if you sell your car early, as well as if you pay off the remaining finance yourself.

    Terminating your agreement with your finance provider might also slightly affect your credit score, as closing an instalment account can impact credit history. Impacts are generally minimal, but important to keep in mind nonetheless.

    You can minimise or avoid repayment fees by: 

    • Negotiating initial loan terms
    • Reviewing your loan agreement
    • Checking for penalty waivers, especially those associated with specific circumstances, like financial hardship or unexpected life events
    • Considering partial repayment to reduce fees.
    • Monitoring interest rate changes 
    • Exploring refinancing options, particularly if they offer lower interest rates or lenient early repayment terms.

    Additional ways to pay off car finance loans

    Regardless of your financial reality, there are many ways to approach loan repayment faster. Popular strategies include:

    ✅ Make the occasional larger payment to reduce principal loan amount 

    ✅ Increase monthly payments

    ✅ Explore refinancing options to replace your existing car loan with a new one with better terms

    ✅ Automate monthly payments or consider biweekly payments

    ✅ Negotiate interest and loan terms

    ✅ Make car finance a priority

    ✅ Be flexible and adjust your repayment strategy as needed


    Can I pay a lump sum off my car finance?

    Yes, you can make a lump sum payment towards your car finance. This may even help change your equity balance from negative to positive. Check your loan agreement for any prepayment penalties and inform your lender about the additional payment.

    Can you give back a car on finance early?

    Returning a car on finance early is possible, but it may incur fees. Consult your loan agreement and discuss terms with the lender to understand potential consequences and requirements.

    What happens if you pay off your car loan early?

    Paying off your car loan early can save on interest, but it may involve prepayment penalties. Review your loan terms, consider potential fees, and contact your lender for specific details on the process.

    How can I track the value of my car?

    If you don’t know your car’s value to begin with, how can you know the impact your current financing agreement has on its market price?

    All vehicles depreciate at varying rates, with no one rule accounting for a car’s changing value. However, with Motorway’s Car Value Tracker, you can receive free, reliable monthly price alerts for up to six vehicles at once. 

    Follow changes to your car’s value to choose the best time to sell, and make informed choices about investments in your car’s maintenance.

    Should you sell your car?

    Want to learn more about the best ways to sell your car? Check out more of our guides here, covering everything you need to know about different finance schemes, and what they mean for you as a car owner.