Expert reveals ins and outs of partial and early settlement

If you've bought your vehicle through finance, you may think that you’re locked into your contract and need to stick to your monthly payments until the end of the deal.

However, whether your financial circumstances have changed or you're simply contemplating a new approach to paying back your motor, you could have the chance to pay your loan off early.

Purchasing a car outright is not too uncommon. According to GoCompare, about 60% of Brits prefer to finance their car by paying the price tag from the off, meaning they don’t have to keep up with regular payments in the years to come. So, if you find yourself in a financially comfortable position, you should have the option – if you wish – to extinguish your car loan sooner than expected.

But is it the right solution? And what does it mean for you? Michelle Rigler, Head of Portfolio at vehicle finance company First Response Finance, explores the ins and outs of partial and early settlement to help you make a decision with more confidence and peace of mind.

Early settlement

In short, early settlement is when a car finance scheme is completed before the end of the agreed loan term.

In this scenario, you would either cover the total payment in full or simply end the agreement early without it impacting your credit score.

Rigler said: "Car finance is always a great way to spread the purchasing cost of a vehicle into more pocket-friendly monthly payments.

"In fact, if you don't have the means at first to buy a vehicle outright, car finance still gives you the opportunity to jump behind the wheel without having to wait and save.

"However, over the course of the agreement, your financial situation might change. In this case, early settlement can allow you to pay your loan in full, meaning you'll no longer have to worry about monthly instalments.

"You could also save money in the long run by not being charged interest on the rest of the agreement. So, if you find yourself in the right economic position to do so, early settlement could be an option to take into consideration."

Some people might opt for early settlement if they don’t need their car anymore and want to sell it. However, you may want to think twice before going down this route if you're in negative equity.

In the world of car finance, negative equity is the difference between what your car is worth and how much you still owe your lender. In essence, if your vehicle is worth less than what you still need to pay back, you're in negative equity.

In this circumstance, when you come to sell your motor, you'll also have to cover the difference, so it might not always be the right option for everyone.

Partial settlement

Partial settlement is another solution if you're looking to make additional payments so you can end your car finance agreement early.

Rigler explained: "When it comes to partial settlement, you're making a payment in addition to your contracted instalments, in turn reducing your remaining balance. This means that, since you've already paid down part of your car finance, we'll recalculate the remaining interest on your deal and decrease your total loan balance.

"With a smaller loan balance, you can then choose between two different routes. One option is to keep your current monthly instalments and shorten your repayment term. The second one, instead, is to opt for lower monthly instalments but keep the same payment term. It's completely up to you!

With a clearer picture of what both solutions entail, you can make a more conscious decision when deciding to pay back your loan sooner than contracted. But if you have any further questions or queries, feel free to get in touch with your car finance provider – they're  responsible for helping and guiding you through all the best options for your pockets.