Cut your car finance costs

hand with a car keys....
hand with a car keys....

Car finance is a great way to get behind the wheel of a brand new motor, but it can also turn into a financial burden. If you're keen to cut your costs, you can put and end to the monthly direct debits by paying the agreement off early, or returning the car.

There are, however, conditions and costs attached, which vary depending on your particular agreement, so it's important you're aware before you make any decisions.

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Personal contract purchase (PCP)
If your leasing arrangement is by way of a personal contract purchase, you may repay early or return the car. Provided you have already paid at least 50 per cent of the cost of the car, you have the right to return the vehicle to the finance provider (known as voluntary termination). Even if you are not at that stage in the payments, you can choose to pay the difference between what you owe and half the car's cost. Where the car's value has depreciated to the point where it is worth less than the remaining payments you owe, a voluntary termination makes sense.

On the other hand, if the car's current value adds up to more than the remaining payments, you may be better off paying off your lease early and keeping the motor. Call your finance provider and ask for a settlement figure. Once you've made the final payment, you can either choose to keep the car, or if you're short of cash, sell it once you have settled with the finance provider.

Personal contract hire (PCH)
In the case of personal contract hire, you will likely be forced to pay off the leasing costs in full before you can return the car, so it's important that you call the provider to find out exactly what you would owe. Alternatively, you may be able to reduce your monthly payments by coming to an arrangement to extend the length of the lease (which will ultimately cost you more) so it's worth speaking to your provide if you are struggling to meet the monthly leasing charge.

Hire purchase (HP)
As with PCP, a hire purchase agreement allows you to return the car early, provided you have already paid half of the total cost. However, HP lenders can also charge you for repaying early, and your credit agreement should detail these. The amount they can charge is capped by law, but you can expect to pay the outstanding capital borrowed (minus interest), plus a little extra.
This could be either one per cent of the amount repaid early, 0.5 per cent of the amount repaid early if there you have less than 12 months remaining in the agreement, or the remaining interest, if you still owe more than £8,000. Whichever is the lowest of these three amounts will be added to the final amount owing.

No matter what type of contract you have or your reasons for wanting to end an existing agreement, if you have savings, it is always worth considering whether it makes more sense to use the nest egg to pay off the agreement. For instance, with interest rates notoriously low at the moment, you may be earning less on your savings than you're paying in interest on the finance agreement, in which case it's sensible to use the savings to free yourself from the contract.

Have you bought a new car through one of the above? What advice would you give to other motorists considering repaying early? Leave your comments below...

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