Paying off vehicle finance early

It’s always a relief when you’re able to pay off your debt before the repayment period is over, particularly when it comes to higher-value debt such as vehicle financing.

But are there penalties for doing so? And if you don’t have the money on hand, how can you speed up your vehicle debt settlement?

Tip: Paying your instalments on time helps you improve your credit score. Register for CreditSav to access yours.

Repaying your car: Is it worth settling early?

According to Rudolf Mahoney, national sales manager for retail in WesBank’s fleet management and leasing department, settling your vehicle finance early is always a good idea, as you will save on interest over the long term.

Lebogang Gaoaketse, head of marketing and communication at WesBank, notes further that, in most cases, no penalty interest is charged.

“The settlement is calculated on the capital amount owing at that point in time, and interest is calculated from when the last instalment was paid the previous month, up to the last day the settlement amount is valid for,” Gaoaketse says.

“However, in some cases, penalty interest is payable, mainly on large agreements that fall outside of the scope of the National Credit Act. The settlement on these agreements is the sum of the outstanding capital balance plus daily interest, as well as an early termination fee which is based on three months' interest.

“WesBank may waive this interest should the client refinance, or have a good business history with WesBank,” Gaoaketse adds.

READ MORE: Can you take out vehicle finance on an old vehicle?

How can early settlement be achieved?

The following simple techniques could set you on the path to early vehicle financing repayment.

Make extra payments

Sometimes you find yourself in a financial position where you can pay a bit more than the agreed amount. In this case, look at making bigger monthly repayments, but make sure it is a feasible amount that won’t compromise your finances in other areas.

Avoid the "skip payment" option

Often lenders or financiers will offer you the option to skip making repayments at some stage in the agreement. Sometimes it’s at the beginning, which means you’re exempt from making payments for the first two months. Typically, lenders also allow for a payment break during December.

While the obvious temptation is to take full advantage of these breathers, this only extends your loan in the long run, according to experts. While this may not seem like the worst thing, it also means that interest is tacked on.

Make a bonus payment

Making extra payments throughout the year might not be feasible for everyone, but for those who receive a bonus, making a sizable extra payment could be an option. Even one extra payment a year can help you pay off your debt a little earlier. 

Another tip is to deposit extra payments into the vehicle finance account, which will be seen as "advance payments", and will continue to accumulate with interest. Once you have a sizable amount of cash in advance, contact the bank and ask them to recapitalise your loan. Here, you can choose either to lower your monthly instalment or decrease the loan term.

While paying off any debt earlier than necessary requires discipline and careful financial planning, it is not an impossible goal. Car repayments can lock you in for several years, which is not ideal if you want to take on another big debt, like a bond, for example. Therefore, settling early is well worthwhile.

Protecting your car is vital. For competitive Car Insurance click here.