24 Nov How to Reduce the Cost of Your Car Finance?
Are you one of those people who are struggling with their car finance payments? Well, you have the options of either paying off the agreement earlier than the required period or simply returning the car. However, before taking any decision, you need to read this guide in order to get aware of the different conditions and costs that may result due to your decision.
Paying Off the Finance Agreement Early
Car leasing arrangements can be categorised in two major types, namely personal contract purchase (PCP) and personal contract hire (PCH). However, both of these have unique conditions concerning vehicle return or early repayment. Here is a quick guide to make things easier for you:
Personal Contract Purchase (PCP)
In case you have already paid an amount that is equal to 50% of the car’s value, then the Consumer Credit Act 1974 gives you the right to return your car to the finance provider, an act which is also known as ‘voluntary termination.’
However, returning the car may only be wise if its value had depreciated so much that your remaining payments may result in an amount of money that is greater than the actual value of the car. On the other hand, if the current worth of your car is greater than your outstanding balances, then you have the option to pay a settlement figure to your finance provider and then putting your car up for sale.
If you’re thinking of making an early repayment, then you have to decide on a settlement figure with your finance provider. Settlement figure is a specific amount of money that you need to pay in order to end the contract. After doing so, you will have the following options:
- Paying off the contract and then keeping the car to yourself- however, this will only be possible if the decided settlement figure is lower than the costs that might be incurred if you continue with your monthly payments.
- Paying off the contract and then putting up your car for sale- this can be of great help if you are facing serious financial constraints. However, remember that you will only be allowed to sell your car after you have paid the settlement figure.
Personal Contract Hire (PCH)
In case you have decided to lease a car through personal contract hire (PCH), you might need to think again about it. This is because it might lead to you paying off the leasing costs fully in case you decide to return the car. Therefore, think about this decision again and get to know about all the costs that might be incurred during the process.
You can also seek help from your financial provider if you are facing any difficulty in paying the monthly leasing amount. It can end up in getting an extended length of the lease for yourself, which will not only help in lowering your monthly payments but will also help you in finding some other settlement for yourself.
Early Repayment of an HP Agreement
TIP: Make sure to inform your finance company either by email or letter, whenever you decide to return the car. If this is not done, then you may face difficulty since you will end up getting defaulted on your payments, which will simultaneously affect your credit score.
Hire purchase (HP) will let you return your car earlier than the required period if you have made the payment that is equal to the half of the car’s cost or if you have already made up the difference between your payment and half of the car’s cost. However, in case you have made a payment that is greater than half of the car’s cost, then you will not be eligible to receive a refund of the difference.
The total price and the amount that you are required to pay in case you decide to return your car should be mentioned in the credit agreement that you sign with your finance company.
What are Your Rights When Repaying Hire Purchase Early?
The law decides the sum that can be charged to you by the lender in case of early repayment of an HP agreement. However, you should be ready to pay the remaining capital along with one of these:
- An amount equal to 1% of the amount that has been repaid earlier
- An amount equal to 0.5% of the amount that has been repaid earlier, in case there are less than 12 months remaining
- The outstanding interest. However, remember that you will not have to pay any additional fees if you are repaying early an amount that is less than £8,000.
When to Use Your Savings?
In case your interest earnings from your savings are lower than the interest that you have to pay on your car finance, then perhaps using your savings to pay off the contract early may be the most suitable solution.
Ensuring that You are not Paying Any Unnecessary Insurance
You need to review your finance agreement and check carefully if the finance provider has added the payment protection insurance to it or not. This is usually added in case you get injured or fall ill, so that it can be used for the repayments. However, many people are unaware of this insurance and have been charged by the finance company for it, even when it was not beneficial for them. Therefore, you need to understand and look carefully before signing the agreement.