Are you able to pay out your loan early, and what are the consequences?

You can pay out your car loan early, however, there may be certain fees or penalty charges for doing so depending on your car loan lender and the specific terms of your agreement.

If you have a consumer loan, including a car loan, lenders are required to explain in either their contracts or terms and conditions any fees and charges involved in paying your loan out early, along with all the other features of your loan, such as interest rate, establishment fees, origination fees and any other charges and ongoing fees.

If you have a variable car loan rate, then there's likely to be fewer fees or penalties associated with paying it out the loan amount earlier than the full term.

However, if you have a fixed car loan, then this usually means higher break costs, as lenders will try to regain potential future repayments. Read on below for more information on why fixed-rate car loans and exit fees. 

How can you pay off your car loan early? 

So, what's the process? There are two main ways in which you can pay your car loan off earlier. 

  • Additional monthly repayments 

  • Lump-sum payment 

Making additional repayments each month will help you pay back your debt faster over time, while a lump sum payment involves paying the full amount of the remaining loan balance back at once. If you have a balloon payment you will also have to take that into consideration.  

Related: Read our tips for paying back your car loan faster.

Benefits of paying your car loan early  

Save money on interest payments 

Paying out an auto loan early will save you money on future interest repayments. Without worrying about interest repayments you can free up your money for additional savings or to put towards other expenses. 

Can help in paying off other debts 

If you're managing multiple debts, clearing at least one can help put more towards other debts you need to repay. 

You'll own your car outright 

As most car finance is in the form of a secured loan - meaning your vehicle is used as security - once you've paid out the leftover balance you'll own your car outright. 

Disadvantages of paying a car loan off early

Early repayment costs 

The biggest downside to early repayments is the possible additional costs like exit and break fees. These charges will vary depending on the lender and type of car finance you have but they can end up being substantial. 

Reduce your savings 

Just because you can pay off the remaining balance doesn't necessarily mean you should. It's important to weigh up the costs and do what makes sense for your personal financial circumstances. Before making a decision, it's always best to seek independent and professional financial advice. 

Why are there penalty fees for paying back a car loan early? 

It is a requirement to explain how the interest is calculated on your loan and with most fixed rate car loans; interest would be calculated on the daily balance, charged monthly in arrears.

What this means is the interest component would be calculated on the balance for that day. So in any given month, the interest is calculated on the outstanding balance of your loan every day and then added up over the month to calculate your monthly interest payable. This means any additional payment would reduce the outstanding balance and interest payable on that given day and for the days moving forward.

What this also means is that when you pay your loan out early, any outstanding interest from that day moving forward, would not be payable, which would mean that you have only paid your interest for the time that you have kept your car finance active.

Due to most car loans having fixed interest rates, they have agreed contractually with you for the period you have accepted to take the loan for. If you ‘break' the loan early, to recover any costs the lender may lose, in most cases with most lenders there would be some kind of early exit fee.

The car finance early exit fees with most of the major lenders are not as significant as any fixed rate home loan break loan costs, and that would be due to being priced into the interest rate from the start and the average amount financed being substantially less, meaning any loss would also be much less.

Car loan early exit costs are usually a set amount that reduces the longer you keep the loan and may have a small discharge fee. In most cases with most lenders, the early exit fees, including any discharge fees would only be in the hundreds.

If you’re ready to get a car loan, or have any questions on paying a car loan early, get in touch with our car loan experts today.