Ending Car Finance Early: Settle, Sell or Hand Back

How can you end car finance early?

There are four ways to end car finance before the term is up, and which is cheapest comes down to your settlement figure versus the car's value. Two numbers settle the question.

Whatever route you take, the first step is the same: ask your lender for a settlement figure, or estimate one with the settlement calculator. That tells you exactly what it costs to clear the agreement today, after the statutory interest rebate is applied.

The second number is the car's market value. Get a valuation from a couple of sources: a free online valuation tool and a dealer part-exchange quote will bracket the range. Subtract what you owe from what it's worth: a positive number is equity you keep, a negative number is negative equity you'd have to cover.

• Settle in full: pay the outstanding balance now and save the interest left in the term.
• Sell or part-exchange: settle the finance from the sale and keep any equity.
• Voluntary termination: hand a PCP or HP car back once you've paid 50% of the total amount payable.
• Hand back at the end: return a PCP car when the agreement finishes, within its mileage and condition terms.

Settling your finance in full

Settling means paying the outstanding balance in one go to clear the agreement early. You save the interest you'd have paid over the remaining term, minus a small deferment charge.

Under the Consumer Credit Act 1974 and the Consumer Credit (Early Settlement) Regulations 2004, you get a statutory interest rebate when you settle early. Because interest on most car finance is front-loaded (heavier in the early months), the rebate can be larger than people expect. That is why a settlement figure is usually lower than simply adding up the payments left.

The rebate is worked out to a settlement date 28 days after the lender receives your notice (regulation 5). Where the agreement's original term is more than a year, as most car finance is, the lender may push that date back by a further month or 30 days (regulation 6), which adds up to about one month's interest to the figure. Work out your number on the settlement calculator before you commit.

Selling or part-exchanging the car

You can sell or part-exchange a financed car, but you must settle the finance first because the lender still legally owns it. If the car is worth more than you owe, the difference is yours to keep.

Sell privately and you clear the settlement figure from the sale, then pocket any equity. Part-exchange and the dealer handles the settlement for you, paying your lender directly and applying any leftover value as a deposit on your next car. The full step-by-step is in selling a car on finance.

Either way, the lender must be paid before ownership can pass. Selling a car you don't yet own, without settling, is a breach of the agreement, and you still owe the lender. A private buyer who bought in good faith without knowing about the finance is usually protected by Part III of the Hire Purchase Act 1964, but a trade buyer is not and can lose the car to the lender.

Voluntary termination: handing the car back

Voluntary termination lets you hand a PCP or HP car back once you've paid 50% of the total amount payable, and owe nothing more for the finance itself. It's a statutory right under Consumer Credit Act 1974, sections 99 and 100.

VT is the strongest tool when the car is worth less than you owe, because selling would leave you covering a shortfall. The total amount payable is the deposit, all monthly payments, the optional final payment on a PCP (the balloon, set at the GMFV) and any fees added together. Once you've paid half of it, you can return the car and walk away from the finance, paying only for damage beyond fair wear and tear and any excess mileage.

The 50% figure is printed in the 'Termination: your rights' box on your agreement. You must give written notice to the lender to trigger VT, and you must not have let the agreement be terminated by the lender first. Read how it works and check your 50% point on voluntary termination.

Which option works out cheapest?

The cheapest option depends on whether you have positive or negative equity. If the car is worth more than you owe, sell. If it's worth less, voluntary termination usually wins.

If you owe more than the car is worth, you're in negative equity. Check how much with the negative equity calculator before you decide. Negative equity narrows your options but doesn't remove them: VT, settling with a top-up, or waiting for the gap to close are all still open to you.

Common mistakes to avoid

Three mistakes cost people money when ending finance early: forgetting the rebate, confusing VT with surrender, and selling without settling. None are hard to sidestep once you know them.

• Assuming the settlement is just the remaining payments added up. The statutory interest rebate makes it lower.
• Mixing up voluntary termination (a protected right at 50%) with voluntary surrender (which can leave you owing a shortfall). They are different.
• Selling a financed car privately without clearing the lender first. The lender still owns it and can reclaim it.
• Ignoring excess-mileage and damage charges on a PCP return or VT, which can wipe out the saving.

Your rights under the Consumer Credit Act 1974

Every option above is built on rights the Consumer Credit Act 1974 gives you, not favours the lender chooses to grant. Knowing which section applies makes you harder to fob off.

Section 97 gives you the right to a settlement figure, free, within seven working days of a written request. Sections 99 and 100 give you voluntary termination once you've paid 50%. The Consumer Credit (Early Settlement) Regulations 2004 govern the interest rebate, the 28-day settlement date and the lender's option to defer it by a further month. If a lender resists any of these, a written reference to the section usually ends the discussion.

Five exit options, side by side

The five real ways to end car finance are settle, sell, part-exchange, voluntary termination, and hand-back at the end of a PCP, and what each costs depends on your equity and timing.

Two routes get confused constantly: voluntary termination and voluntary surrender. VT is the protected statutory route at 50%; surrender is a separate route where the lender sells the car and can chase you for the shortfall. Always check whether you've hit 50% before handing anything back, and read the voluntary surrender page so you know which one you're actually using.