Car Loan Early Repayments Explained

Car Loan Early Repayments - Understanding the Cost of Ending a Car Finance Deal Early

Learn how early repayments can save you money on your car loan. Our guide explains the benefits, costs, practical examples, and FAQs, providing clarity on contract details for smart financial decisions.

Updated 2 March 2024

Summary

Many New Zealanders consider early repayment of their car loans when they receive a sudden lump sum of money or salary increase, often aiming to cut down on high-interest debts (like car loan repayments).
Others explore refinancing options, comparing potential savings against their existing car loan's 'break fees' to determine if refinancing will reduce their overall interest costs.
New Zealand law (outlined in the CCCFA) prohibits car lenders from profiting from early repayment charges per the Bank Ombudsman's guidance. Lenders are only permitted to 'recover their costs' when a loan is repaid early, ensuring fairness in the financial system.
The good news is that very few lenders charge early repayment fees or recover their forgone interest costs if you decide to make a regular or full-settlement overpayment.
However, some lenders charge heavily for early repayment, so it's essential to understand the specific terms, potential costs, and fees written in your contract (should you have an existing loan).
This guide provides key information tailored to New Zealand's financial landscape, helping you navigate the decision-making process with a comprehensive understanding of the costs and benefits of early car loan repayment or refinancing.
Our guide does not compare lender contracts: Given the vast array of lenders and the diversity in their contracts and terms, it's impractical to compare all early repayment policies comprehensively. We suggest you carefully review your car loan contract and contact your lender to understand the early repayment terms and costs.

Why Do People End Car Loans Early?

There are several reasons people contemplate ending their car loan contract early:

Financial Hardship: Economic downturns, unexpected layoffs, or increased living costs drastically impact the ability to keep up with car finance payments. While selling a car and repaying the loan is one option, our guide to car loans and hardship has more details and options.
Interest Rate Reduction: Refinancing your car loan can become an attractive option when interest rates decline, or you're in a better financial position (higher salary, less debt, etc.) than when you first took out your car loan. Securing a lower interest rate can reduce your monthly payments or shorten the loan term, leading to significant savings over time. To compare total costs, you'll need to add up the final balance owed plus early repayment fees and any other charges with the total cost of the new loan to see if it's a financially sound decision.
Overestimated Affordability: The total cost of owning a car extends beyond the monthly finance payments. Expenses such as insurance, regular maintenance, Warrant of Fitness (WOF), registration, and fuel can add up, sometimes exceeding initial estimates. If these costs are unsustainable, the next step is to consider selling the car. Our guide to selling a car with finance owing has more information.
Lifestyle Changes: Relocating to a suburb or city with better public transport options or experiencing a change in commuting needs (such as working from home) can reduce the need for a car if it is underused and incurs unnecessary expenses.
Better Financial Opportunities: Car loans are generally expensive, and the repayments eat up a lot of your payday. If you've received a lump sum (inheritance, bonus) or find yourself in a better financial situation than when you first got the loan, it's normal to reassess your financial priorities. Reducing car loan interest costs by repaying the full amount or regular sums above the agreed-upon repayment schedule is a popular option, given investment returns are unlikely to be as high as what your car loan is costing you.

Important: If you need to sell your car as part of the early repayment, our guide to selling a car with finance owing has more details.

Understanding Regular Early Repayments vs One-Off Full Repayment

There are two options when considering early repayments on a car loan, and the fees can vary significantly. We explain the differences:

1. Regular Early Repayments

This refers to making extra payments on top of your ongoing loan payments. These payments can either reduce the monthly payment amount for the remaining term or shorten the loan duration.
Interest Savings: By making regular early repayments, you can save on interest costs over time because the principal balance is reduced faster than scheduled.
Frequency: These can be made monthly, fortnightly, or at any frequency that suits your financial situation (e.g. times with your payday).
Fees: Typically, regular early repayments do not incur administrative fees each time you make an additional payment. However, this can vary depending on your specific loan agreement, and you may be charged a $1 or so fee for every payment made.

2. One-Off Full Repayment:

This is a single, large payment that completely pays off the remaining balance of your loan before the end of the term. This is often done when a borrower receives a large sum, like an inheritance or a work bonus.
Settling the Loan: A one-off full repayment closes out the loan, meaning the loan ends and no more repayments are needed.
Fees: Unlike regular early repayments, a one-off full repayment may incur a fee, often called a 'break fee' or 'early repayment charge.' Some lenders charge these, but many don't.

Know This: The amount you might have to pay if you repay your loan early all comes down to what's written in your loan contract. Good loan contracts don't have any extra charges like early repayment or break fees. They also don't charge you for things like the interest they miss out on if you pay off the loan early.

How Much Can You Save by Repaying Your Car Loan Early?

Repaying your car loan early can lead to significant savings. The amount you save depends on several factors, including the outstanding balance, the term of your loan, the interest rate, and the timing of your early repayment. Here are two examples to illustrate these savings if you decide to repay in full which we publish for reference only. Pease note, we've not included any early repayment fees or break charges:

Example 1: 5-Year Loan, Repaid 2 Years Early

Loan Details: $20,000 loan at a 15% interest rate, originally set for 5 years.
Repayment Plan: Repaid 2 years early.
Monthly Payment: Approximately $475.80.
Total Paid Originally: Approximately $28,547.92 over 5 years.
Total Paid with Early Repayment: Approximately $17,128.75 over 3 years.
Savings: Around $11,419.17 in interest.

Loan Amount	Interest Rate	Original Loan Term	Early Repayment Term	Total Amount Paid Early	Savings
$20,000	15%	5 years	3 years	$17,128.75	$11,419.17

Example 2: 7-Year Loan, Repaid 3 Years Early

Loan Details: $30,000 loan at a 20% interest rate, originally set for 7 years.
Repayment Plan: Deciding to pay off the loan 3 years early.
Monthly Payment: Approximately $666.19.
Total Paid Originally: Approximately $55,959.62 over 7 years.
Total Paid with Early Repayment: Approximately $31,976.93 over 4 years.
Savings: Around $23,982.70 in interest.

Loan Amount	Interest Rate	Original Loan Term	Early Repayment Term	Total Amount Paid Early	Savings
$30,000	20%	7 years	4 years	$31,976.93	$23,982.70

How Much Does Early Repayment Cost?

What you'll pay depends on your contract. Many lenders don't charge early repayment fees, charges or break fees, or if they do, it will be a one-off fee of less than $100.

However, lenders such as Toyota Financial Services, Geneva Finance and UDC Finance all have contracts that "may" require you to pay them for the loss (from early repayment) on top of early repayment administration fees.

Why do such charges exist?

Lenders borrow money at a fixed interest rate to lend to you. If you pay back your loan early, the lender may still need to pay interest on the money they borrowed. If interest rates have changed, this could mean a loss for the lender.

The Early Repayment Charge covers this potential loss if the lender has to break its borrowing arrangement because you've paid back your loan early.

How is the charge calculated?:

The cost depends on the difference between the interest rates when you took the loan and the rates when you repay early.

It also considers how much you're paying back early, how long was left on your loan, and how much interest rates have changed.

The lender uses these factors to calculate the charge, which varies depending on the day you make the early repayment.

How this works is best explained by three typical examples:

Example 1: Regular Payment Acceleration

Jane has a car loan with a balance of $20,000. She decides to pay an extra $500 monthly on top of her scheduled payments.
Early Repayment Charge: As Jane is accelerating her regular payments and not settling the full loan amount, she won't pay any administrative fees for full prepayment, given it's a part-payment.
Her early repayments will reduce the principal faster, potentially shortening the loan term and saving on interest.

Example 2: Lump-Sum Repayment

Alex uses a $10,000 work bonus to repay his $30,000 car loan.
Since Alex is using the lump sum to reduce his loan balance and not to pay it off entirely, he might not face the full early repayment charge that would apply for a total loan payoff.
Early Repayment Charge: Alex might still incur some charges depending on his loan agreement. If his lender calculates charges based on the lost interest (the interest the lender would miss out on due to the early repayment), then there would be a calculation to determine this cost.
Calculation of Charges: How much is charged is based on factors like the remaining loan balance after the lump-sum payment, the interest rate, and how much the early repayment affects the lender's expected interest earnings.
Overall, it's likely that paying down a significant portion of the loan will decrease the overall interest he pays over the life of the loan, even if he incurs some charges for the early payment.

Example 3: Full Loan Settlement

Sarah inherits $50,000 and decides to use it to pay off her remaining car loan balance of $15,000 completely.
Early Repayment Charge: Since Sarah is paying off the entire balance of her car loan before the end of the loan term, she may be subject to a full prepayment charge (made to compensate the lender for any potential financial loss due to the early settlement of the loan).
Administrative Cost: Sarah will also need to pay an administrative cost related to the full prepayment. This is usually anywhere from $0 to $100 and is set out in the car loan contract.
Calculation of Charges: The car loan contract sets out what Sarah owes the lender and typically involves assessing the value of forgone payments, which includes considering the amount of each payment, the number of days remaining till each scheduled payment, and the annual fixed interest rate.
By paying off her loan in full, Sarah would eliminate any future interest costs, but early repayment charges must be factored into any decision.

Know This: These three examples are for illustrative purposes. The actual charges for making an early repayment will depend on your car loan contract's wording, changes in interest rates and the timing of your repayments. To make an informed decision, get the costs in writing upfront from your car lender before making early repayments.

Our Checklist For Making an Early Repayment Decision

We've created a straightforward process to help you decide whether early repayment of your car loan is the right move for you.

This checklist guides you through all the necessary steps, ensuring you have all the information needed to make a well-informed cost comparison.

Review Your Loan Agreement: Carefully read your loan contract and pay special attention to terms about early repayment, such as any fees or clauses regarding lost interest.
Calculate Total Costs: Tally up what's left on your loan and any early repayment fees. If it's unclear, and in many cases with a lender who charges fees, it will be, request a clear cost breakdown from your lender. You can then weigh these figures against the total interest you'd face with continued regular payments.
Check Your Affordability and Financial Demands: Before making any decisions, ensure that this decision aligns with your overall financial stability. Early repayment mustn't disrupt your other financial responsibilities or drain your emergency savings.
Assess Alternatives: If you're facing financial challenges and are trying to sell your car and repay the loan, consider other options like renegotiating your loan terms or applying for a hardship variation.
Contact Your Lender: Talk to your lender about your early repayment plans and get a finalised list of any early repayment fees to clear up any uncertainties.
Prepare for Administrative Processes: Be ready for any paperwork or steps your lender needs to process your early repayment. This preparedness ensures a seamless and efficient process.

Know This: Whether you're making regular additional repayments or settling the entire balance at once, it's crucial to understand all the potential costs and benefits.

It's critical to get a detailed breakdown of any fees from your lender before deciding to give you a clear picture of the financial implications of early loan repayment.

Frequently Asked Questions

Can car lenders waive early repayment fees even if they're written into the contract?

It depends on the lender and the specific terms of your loan agreement. Some lenders may be willing to waive or reduce these fees, especially in circumstances of financial hardship. The best approach is to ask the lender if they can offer flexibility.

Do car lenders profit from early repayment fees despite the law stating they can't?

No - under New Zealand law, lenders cannot profit from early repayment fees. They can only charge fees to recover the costs associated with the early repayment of a loan. This includes administrative costs or the loss they incur from the interest they would have received had the loan continued as per the original agreement.

Will ending my car finance agreement early affect my credit history?

Ending a car finance agreement early will not necessarily affect your credit history negatively, especially if all payments are made on time, and the loan is settled as agreed. However, any missed or late payments leading up to the early settlement will have a negative impact.

Is refinancing a good option to consider for early repayment?

Refinancing can be helpful if you can secure a lower interest rate or better loan terms. However, comparing the potential savings from refinancing with any fees associated with breaking your current loan is important.

Can I sell my car to repay the loan?

Yes - this is an option; our guide to selling a car with finance owing has more details. However, you must pay the difference if the sale doesn't cover the full amount.

What are my options if I can't afford to repay my car loan early but want to keep the car?

The most common alternatives include:

Loan Restructuring: You can talk to your lender about adjusting the terms of your loan, like the interest rate or repayment period, to make your payments more manageable.
Negotiating with the Lender for Hardship Variation: If you're facing financial difficulties due to unforeseen events (like illness, job loss, or the end of a relationship), you can apply for a hardship variation as our guide outlines.