Can I end a car finance agreement early?

Published: 19 May 2023

There are lots of reasons why you might want to pay off car finance early but there are usually terms and conditions you will need to follow. Here we look at how to pay off your car finance early, what you need to watch out for, and the best alternatives.

When you sign up to a car finance agreement, you agree to make repayments over a set period of time. But during the length of the agreement things can change and you may want to pay off your car finance agreement early. Reasons could include the following:

• You’re moving away and no longer need your car

• The cost of the monthly payments has become too expensive

• You hope to save money by paying off the finance agreement early

It is possible to end a car finance agreement early but there are rules you need to follow. 

If you’re still in the first 14 days of the finance agreement, you’re still within what’s known as the cooling off period. In such cases, under the terms of the Consumer Credit Act 1974, you’ll be able to end the agreement by paying your loan amount off in full. 

However, if you’ve gone past this 14-day period you’ll need to check the terms and conditions of the finance agreement to calculate the best way of ending it early.

If you have decided that it makes sense to pay off your PCP or HP car finance agreement early, and you can afford it, how you do it will depend on the type of agreement you signed.

A Personal Contract Purchase (PCP) car finance agreement requires you to make an initial deposit (and then repayments over the term of the agreement. If you want to keep the car you’ll be required to make a final ‘balloon’ payment and pay an option to purchase (OTP) fee (usually between £1 and £10), or you have the option of returning the car or starting a new agreement with a different car instead. 

If you want to pay off a PCP early, you can do so by asking the car finance provider for a settlement figure. If you pay this, you should be able to end the agreement early and you then become the car’s legal owner. You then have a choice of either keeping the car or selling it.

A hire purchase (HP) car finance agreement works slightly differently to a PCP agreement and the rules for ending an agreement early are slightly different as a result. This is because with HP there’s no ‘balloon’ payment at the end of the contract – once you’ve paid all your monthly instalments and the option to purchase (OTP) fee (usually between £1 and £10) the car is yours.

The amount a lender can charge you to pay off an HP agreement early is fixed by the Consumer Credit Act 1974. 

The most you can be asked to pay is the outstanding capital on what you borrowed,  but not the interest, plus whichever amount is the lowest of these three:

• 1% of whatever you’re repaying early

• 0.5% of whatever you’re repaying early if you have less than a year remaining on the contract

• The remaining interest on the contract

You can find out more about ending an HP agreement early at Money Helper – a free and impartial government-approved financial advice service. 

You’ll usually have 28 days to pay the final amount if you want to end a car finance agreement early.

• PCP vs HP car finance – which is best for you?

• Can I get car finance with bad credit?

• How to save money on car ownership

Instead of paying off your car finance contract, you may be able to return the car early and end the agreement. This also depends on the type of contract you signed.

You can end a PCP agreement early if you have already paid for at least half of the total amount payable for the agreement, or you can pay the difference between this amount and what you’ve already paid.

 You can then return the car under what’s called ‘voluntary termination’ which is covered by the Consumer Credit Act 1974. If you’ve paid more than half of the cost of the car, you won’t get any money back.

If you took out an HP agreement, you can return the car if you’ve paid at least half of the total amount payable, or you can pay the difference between this and what you’ve already paid.

Your initial agreement should list how these payments work and how much you would need to pay in order to end the car finance agreement early.

As with a PCP agreement, you can return the car through ‘voluntary termination’ but if you’ve paid more half of than of the total amount payable you won’t get any money back.

You will usually have to pay early repayment fees if you end a car finance deal early. These should be explained when you take out the contract. Before you end the agreement, calculate the cost of keeping it in place, with all the remaining repayments, and then the cost of paying it off early, with any extra fees. 

If you end a finance agreement early under voluntary termination rules, it will show on your credit report. Any finance companies checking your record in future won’t be able to see why the agreement was ended and there’s likely to be little impact on your credit score. But if you use this method a number of times, lenders may assess you as a potential higher risk, which may lead to higher borrowing costs in the future.

In some cases it could make financial sense to settle or end a car finance agreement early. Some of these instances include:

• If the car has depreciated in value to an extent that if you were to make all of the remaining payments you’d be paying more than its current value

• If you want to own the car outright and be its legal owner

• If you’re paying more in interest on your car payments than you’re earning on any savings you have, you might consider using any savings you have to end the agreement early

• If you could buy a different car for less than the cost of the remaining payments

• If the car’s value is more than the amount you would pay over the remaining payments of the contract. In this case, it could make financial sense to pay a settlement figure to the finance company and then sell the car or use it as part exchange on a new car

There are certain considerations you will need to take into account if you go down this route. They include:

• If you apply for another agreement, additional credit checks will be required

• The condition of your car and whether there is any supplementary wear and tear or its roadworthiness can have an impact

• There is a possibility that you will need to make an early repayment fee

If you end a car finance agreement early and you’re handing back the car, the provider will assess the car’s condition. General wear and tear is allowed but if the car needs repairs, you may be charged for them. 

When you took out the agreement, you should have been told what counts as wear and tear and what things you may need to pay for. If repairs are needed, it could be worth getting them fixed before you return the car.

If you want to end your car finance agreement early, but you can’t afford the final sum of money due, then another option is to refinance your loan. 

You could part exchange your car and take out a new finance agreement with a lower interest rate. This will make your monthly payments lower and more affordable. But be aware that you may need to switch lenders to do this, as you usually can’t refinance a loan with your current car finance provider.

However, you’ll need a good credit score to be accepted for a loan at a cheaper rate. Before applying you can use a ree eligibility tool to see what kind of rates are available to you as applying for a new car finance agreement will involve hard credit checks. 

Another option is to apply for a personal loan from a bank or other financial institution. Again, you’ll need a good credit score to be accepted for a loan with a competitive interest rate. 

If you do take out a loan at a better rate than your car finance deal, you can use the money to end the car finance agreement early. The car is then yours to keep or sell, and the repayments you make are to your loan provider. 

However, too many loan applications in a short period of time will affect your credit score, meaning it may prove more costly or difficult to borrow.

This all depends on the value of your car. If you want to end your finance agreement early and the settlement figure your provider gives you is less than the current value of the car, you’re in positive equity. If the settlement figure is more than the current value of the car you’re in negative equity. 

Positive equity is good because the money can be put towards a deposit on a finance agreement for your next car. Another option is to part-exchange your existing car for a new one. After asking for a settlement figure on your existing car you can ask a dealer for a valuation for it. If you're happy with the figure the dealer will do the rest – they will clear the outstanding finance on your car. You can then go ahead and buy a new car, starting a new finance agreement.

You can use our finance checker to check your eligibility for car finance at Cazoo with no impact to your credit score, before you decide to apply for finance. 

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