Perhaps you searched for new or used models on AutoTrader, and you would like to sell your car quickly and easily here to buy that next model as quickly as possible. Maybe you came into some money and would like to reduce some of your monthly finance commitments. Regardless of your reason, we find out if you can pay off a car finance contract early and if there are any implications for doing so here.
Can you legally pay off the capital you owe, or are you subject to additional interest?
Typical car finance contract periods run between 12 months and 72 months. The longer the finance period, the lower the repayments. But by the same token, the longer the repayment period, the more interest you pay on the contract. So, paying off a finance contract earlier makes sense if you can afford it.
Car finance repayments can seem like a substantial financial millstone around your neck. Once the euphoria of buying and owning a new car is a thing of the past, it can be sobering to realise that you still face four or five years of repayments. Cars depreciate quickly in the first few years of ownership, so often, the settlement fee of a contract can far exceed what your now-used vehicle is worth. You can find out what the value of your car is here.
Related: What is the minimum income for car finance?
Can you pay off a finance contract earlier?
Thanks to the National Credit Act, all finance companies must make provisions for the early settlement of loans totalling less than R250 000 with no penalties attached. This means that you can legally pay off the capital amount owed and are not subject to any additional interest on the loan.
Are early settlement penalties at play on larger loans?
In the case of a loan greater than R250 000 (the initial loan amount negotiated at the signing of the contract), some finance companies may charge up to three months' interest on the loan if an early settlement is paid. However, this fee is waived by some companies if 90 days' notice of the intention to settle the loan earlier is lodged with the finance company. Some finance companies will also waive this charge if a new loan is financed with the company.
Most financial advisors think that one of the best ways of saving money is to pay off a vehicle loan quicker than stipulated by the original contract. This can take the form of monthly repayments larger than the required amount or one-off payments, significantly reducing the capital amount owed.
Interest is a significant component of a vehicle finance scheme
On longer-term loans of between 48 to 72 months, in many cases, a large portion of the initial payments goes towards paying off the interest owed on the borrowed amount. This proportion of interest payment versus capital repayment takes time to swing in favour of paying off the capital owed due to how these repayment schedules are structured.
It is also sobering to realise that, over a typical 60-month repayment period, a loan of R300 000 could see some R100 000 of interest being paid off. And, in today's new vehicle market, a loan of R300 000 (accompanied by an R150 000 deposit) could see you driving merely an entry-level SUV rather than some luxury sedan or exotic sports car.
By paying off your loan quicker, you increase the equity in your motor vehicle significantly faster.
Finance companies report that, although loan periods of up to 72 months are negotiated, a typical customer will opt for settlement on a loan at about the 36-38-month mark. This is where equity in the car's resale value has been reached, enabling the customer to consider re-financing a new or newer car.
Choose your new car with a careful eye on its resale value.
When you opt for a new car, peruse the resale values of similar models in AutoTrader to get an idea of what your vehicle will be worth five or six years later, as some cars depreciate much quicker. If you want the best resale value retention, a good rule of thumb is to opt for the most popular models on sale in this country. The more popular the new model, the more people there will be who will be keen on a clean three or five-year-old example once the time comes to trade in.
