The vast majority of motorists tend to buy their cars on some kind of finance deal, whether it is through straight finance (hire purchase) or via a lease. Unfortunately, a lot of those folks end up opting for the wrong finance deal or are fed up with the car they own and fancy a change.
Upgrading to another car whilst you are still in a finance term can often cause negative equity to happen; this is where the money you still owe under the terms of your existing finance agreement (less the value of the car) is transferred to the finance agreement of your new car.
So, if you’re stuck in a finance agreement that you don’t want to be in anymore, what can you do? It turns out that there are plenty of options open to you, depending on your individual circumstances! Here is what the finance manager at Letchworth Volkswagen had to say on the subject.
Assess how much longer you’ve got
Some people are generally impatient about trying to get out of a finance deal when they see a new car on the market that they simply “must have”.
In the United Kingdom, if you have taken out a Hire Purchase agreement and you have paid at least 50% of the amount payable, you are entitled to something called a “voluntary termination” whereby you give the car back to the dealer and they have to auction it off.
This is typically a last resort method, because voluntary terminations are noted in your credit file and can affect your ability to get credit for the next 6 years from the date of entry.
Of course, you are free to simply part-exchange your car in for the new one you want, but you will be in negative equity unless you pay off the remaining amount of your existing finance agreement.
Pay off the finance in cash
An obvious one, but if you’ve suddenly come into a lot of money, you can simply ask your finance company for a settlement figure and pay off the car in cash. You will probably be charged an early settlement fee, the details of which depend on the finance agreement you’ve got.
Pay off the finance with a loan
If you are looking to consolidate your debt, one thing you could do is borrow a significant sum of money to clear any high-interest debts that you have and then pay them off with the money you receive from the loan.
A lot of people do this to lower the amount of money they pay each month, especially with credit card debt but also with some car finance debts where the interest rate can be as high as 50% or more!
Hand the car back to the finance company
As mentioned earlier, this is possible when you have paid 50% of hire purchase agreements. If you have a car on a lease agreement, you can typically only hand the car back once you have made all of the payments as per the terms of your lease agreement.
In some ways, lease agreements are better than hire purchase because you can essentially hand the car back after 3 years or whatever the terms of your lease are, whereas with hire purchase, you have to pay the entire agreement off and then sell the car, or hand the car back once 50% of the car has been paid off but then you have a black mark against your credit file.