How to Lower Monthly Payments on a Car Finance Deal

Navigating Your Car Finance: Cutting Monthly Costs

For many in the UK, car finance is a practical route to vehicle ownership. Yet, as household budgets tighten, lowering monthly payments is a priority. Fortunately, several strategies can help you keep more of your money each month, while still enjoying reliable transport.

Who Should Read This?

This guide is for UK consumers with an existing car finance agreement, as well as those considering new finance. If you’re looking to reduce your monthly outgoings and make your car more affordable, these solutions are for you.

Key Car Finance Concepts and Terminology

Before exploring your options, it’s crucial to understand the basics:

• APR (Annual Percentage Rate): The total cost of borrowing, including interest and fees, expressed as a yearly rate.

• Deposit: The upfront payment you make, which reduces the total amount financed.

• Term: The length of your agreement, usually between 24 and 60 months.

• Balloon Payment: A larger final payment at the end of some agreements (like PCP), reducing monthly instalments.

• Refinancing: Replacing your current finance deal with a new one, potentially at a better rate or over a longer term.

• Negative Equity: Owing more on your finance than the car’s current value.

Understanding these terms helps you weigh up the true cost and flexibility of your agreement.

Options for Lowering Monthly Car Finance Payments

There is no one-size-fits-all solution, but several approaches can help reduce your monthly outlay:

1. Refinancing Your Car Loan Refinancing involves taking out a new agreement to pay off the old one, often with a longer term or lower interest rate. This can significantly reduce monthly payments, though you may pay more interest overall.

2. Voluntary Termination (VT) Under UK law, you can return your car early (provided you’ve paid at least 50% of the total finance amount) without further obligation. This ends monthly payments but means giving up the car.

3. Part-Exchange for a Cheaper Car Trading in your current vehicle for a less expensive one can lower your monthly payments, especially if the new car is more efficient or has lower insurance costs.

4. Increase Your Deposit If you’re arranging new finance, a larger deposit reduces the amount you borrow, leading to lower monthly bills.

5. Extend the Loan Term Stretching payments over a longer period can reduce your monthly cost, but increases the total interest paid.

6. Switch Finance Types Consider options like PCP (Personal Contract Purchase) or HP (Hire Purchase) to see which structure offers lower monthly payments for your situation.

Costs, Impact, and Risks to Consider

Lowering your monthly payment can offer breathing room, but it’s important to weigh the costs:

• Total Interest: Extending your term or refinancing at a higher rate could mean paying more in total.

• Negative Equity Risk: Longer terms or low deposits may increase the risk of owing more than the car is worth if you want to sell or switch.

• Fees and Penalties: Some agreements have charges for early settlement or voluntary termination.

• Impact on Credit: Refinancing or missed payments may affect your credit score.

It’s crucial to understand the full financial implications before making changes.

Eligibility, Requirements, and Conditions

Your eligibility for various options depends on:

• Credit Score: Determines the rates available for refinancing or new finance.

• Current Loan Status: Some lenders restrict refinancing or voluntary termination.

• Vehicle Condition and Age: Affects part-exchange or refinancing approval.

• Deposit Availability: A larger deposit can provide more flexibility.

Always check your current agreement for any specific terms or penalties.

Step-by-Step: How to Lower Your Payments

1. Review your current finance agreement details

2. Check your outstanding balance and settlement figure

3. Assess your credit score and financial situation

4. Research alternative finance deals or lenders

5. Consider refinancing, part-exchange, or voluntary termination

6. Obtain quotes and compare total costs

7. Consult a finance broker for tailored advice

8. Finalise paperwork and confirm changes with your lender

Pros & Cons to Weigh

Lowering your payments can ease your monthly budget pressure, but:

Pros:

• More disposable income each month

• Flexibility to manage cash flow

• Opportunity to upgrade or downgrade your vehicle

Cons:

• Potential for higher overall interest costs

• Longer time in negative equity

• Possible fees for early settlement or changes

It’s about balancing short-term relief with long-term financial health.

Things to Watch Out For

Before deciding, scrutinise the terms:

• Early Repayment Charges: Some lenders charge for settling early or refinancing.

• Impact on Car Ownership: Voluntary termination or part-exchange may mean losing your current vehicle.

• Hidden Fees: Always read the small print regarding administration or set-up charges.

• Effect on Future Borrowing: Multiple finance applications can affect your credit profile.

Consulting with a regulated finance broker, such as Kandoo, can help clarify your options and avoid unexpected pitfalls.

Alternatives to Lowering Payments

If lowering your car finance payments isn’t suitable, consider:

• Downsizing Your Vehicle: Moving to a smaller, more economical car.

• Switching to Leasing: Lease deals can offer lower monthly payments for new cars.

• Using Savings to Pay Off Part of the Loan: Reduces your balance and future payments.

• Car Sharing or Public Transport: Reduces or eliminates car finance costs altogether.

Each option comes with its own set of considerations.

Frequently Asked Questions

1. Can I refinance my car loan with bad credit?

It’s possible, but rates may be higher. Improving your credit score first can help secure better terms.

2. Will extending my loan term always lower payments?

Generally yes, but at the cost of more total interest over the life of the loan.

3. Can I negotiate my car finance deal after signing?

Most terms are fixed, but you can discuss voluntary termination, refinancing, or part-exchange with your lender.

4. Is voluntary termination the same as voluntary surrender?

No. Voluntary termination ends your contract under Section 99 of the Consumer Credit Act; voluntary surrender may leave you liable for the remaining balance.

5. What’s the risk of negative equity?

If your car’s value drops faster than you repay the loan, you could owe more than it’s worth, especially with low deposits or long terms.

6. Can I switch from PCP to HP to lower payments?

Switching may be possible, but it depends on your lender and credit profile.

Next Steps

Start by reviewing your current finance agreement and assessing your financial position. Compare quotes from reputable brokers and lenders, and seek independent advice if needed. Lowering your monthly payments is possible with the right approach and guidance—take the time to ensure any changes suit your long-term financial wellbeing.

Disclaimer

This article provides general information only and does not constitute financial advice. Always consult a regulated adviser or broker before making changes to your car finance agreement. Terms and eligibility criteria apply.