How to pay off a car loan early (or exit one)

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Car loans are great for buying a car you can’t pay for outright – but it feels even better once they’re paid off. So how do you pay it off early or exit one you can’t keep?

Most new cars are purchased with a car loan or novated lease. While car finance is often the best way to get the right car for your budget, sometimes circumstances change or you might want to pay off your car loan early. You might even want to get out of the agreement because it’s no longer feasible.

Right now is a particularly tricky time to lock into financial contracts with rising interest rates putting pressure on household budgets. But this highlights why when it comes time to choosing the right car loan product for you, you understand the terms and conditions well – and you might specifically look for a financial lender that better suits how you want to handle the loan.

Any advice on this page is general. We have not taken into account your financial situation or needs so consider whether this general financial advice is right for your personal circumstances. To seek advice for your own particular circumstances we advise seeing a financial advisor and checking the latest interest rates and product information.

Can you pay off a car loan early or exit from a finance agreement?

The good news is that it is possible to terminate your contract early with most popular forms of car finance, but there are rules about when and how you do it. As for paying a car loan off early, yes you can, but there will likely be some fees associated with exiting the agreement before the term is up (that’s the number of months you agreed to pay the car finance over).

There could be a lot to save if minimising the loan amount – use a good car loan calculator to find out.

Even if you are not able to pay off the entire car loan early, there are some ways to help pay it off sooner than later. In a worst-case scenario, you might have to end the contract, and this can also be done by surrendering the vehicle to your lender (more on this below).

Why it is good to pay off a car loan early

Interest Rates: Rising interest rates – something Australia has been subjected to for the last 12 months – means variable car loan rates can be adding significant costs to monthly repayments. If you are in a position to pay the total sum, it will remove this pressure.

Credit Rating: Paying off more of the loan than required can also improve your credit rating and risk factors, so if you are looking to get finance for a different purchase, this might help you in getting a more competitive rate.

Asset Security: For some loans, the vehicle might be used by the lender as security. For as long as you are paying off the loan, the car will be secured against that finance. Once you pay off your loan the security is released and you fully own the vehicle.

The cons when paying off a car loan early

Fees: The big one when looking at paying off your finance early are exit fees that can add up to hundreds of dollars. Lenders will nearly always have fees that you must pay on top of the loan sum if you want to end the agreement. These can be early exit fees, administrations fees, or other charges for handling the terminitation of the contract before it’s natural term.

Budgeting: It’s a great feeling to pay off finance early if it can be done, but be mindful of any other ongoing payments that could be affected by going ‘all in’. It might in some circumstances be useful to have extra cash for surprises that pop up or to help pay a different debt with higher interest and monthly fees. If you are not sure, we recommend talking to a professional financial advisor.

I can’t pay off my car loan and need to exit the agreement (voluntary surrender)

If you are on the ropes with a car loan, an option might be voluntary surrender. This is not financial advice, so if this is something you are considering we recommend talking to a professional financial advisor. There are also some good tips on the National Debt Helpline website.

Voluntary surrender allows you to hand a car back to the financial lender and end the agreement early. The lender will then seek to compensate itself by selling (usually via auction) the vehicle. There can be additional costs after this if the car did not sell for an amount that covers, in its entirety, the outstanding debt. When handing over the vehicle, it is usual that the customer completes a condition report and takes photos of the car.

Further to this, taking such an action is likely to be recorded on your credit score and have a negative impact.

What to consider when choosing a car loan

Fixed interest rate: If the interest rate is good (low), and it can be fixed, this might be a good idea. As it stands, Australia has gone through a bevy of rises, and it is hard to know if they will fall soon or remain high – or go even higher.

Repayments and redraw: If you can make larger repayments you will minimise the amount owing, but it’s handy if these extra repayments can be accessed if required by a redraw mechanism.

Avoid costly fees: It is hard to avoid all fees in a loan (set-up, monthly fees, early exit, admin charges, etc), but there will likely be savings when choosing finance with the least amount of charges outside of the repayments.

Shorter loan term: The fewer months you have on the loan agreement, the lower the overall interest payment you will make. This means that you’ll save money in the long run by having a shorter loan term than a longer one – but monthly repayments will be higher (and could rise if interest rates rise).

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