Car loan early repayment fees

Paying off a car loan early sounds like a clear win: no more repayments and no more interest. Often it is. But the saving is not the same at every point in the loan, and a fee can take a chunk out of it. This page helps you work out what you would really save before you pay out.

What the law says about the fee

Fees on consumer credit in NZ are covered by the Credit Contracts and Consumer Finance Act. Consumer Protection NZ says fees must be reasonable and tied to actual costs, and it lists early repayment charges as an example of a fee that can be reasonable. Its plain-English guide adds that a lender can charge an early repayment fee but it must be a reasonable estimate of the lender’s loss. You will probably pay an admin fee as well.

Two things follow.

• There is no single national fee. It depends on your lender, your contract and the type of loan.
• A fee that is much larger than the lender’s real loss is open to challenge. If you think a fee is unreasonable, ask the lender what it covers, and you can get help from a community law centre or report it to the Commerce Commission.

A lender’s loss is usually the interest it expected to earn from you for the rest of the term, less what it can earn by lending the money again. That is why the charge tends to be bigger on a fixed-rate loan with a long time left, and smaller or nil near the end.

Where to find your own fee

You do not have to guess. The fee should be in the paperwork you were given when the loan started.

1. The disclosure statement. It must list the amount owing, the interest rate, the fees and what happens if you do not pay. Look for “early repayment”, “prepayment”, “break fee” or “early settlement”.
2. The contract terms. Check whether partial extra payments are allowed as well as paying the whole loan off.
3. A payout quote. Ask the lender for a written payout figure. Lenders must also give you regular updates on your loan, at least every six months, which show what you owe.

A written payout figure lists the balance, any charge and the date it is valid to. Interest runs daily, so the number moves from day to day.

Is it worth it? A worked example

Here is a $20,000 loan at an example rate of 11.95% over five years, paid monthly. The repayment is $444.38 and the total repaid would be $26,663.03. Rates and fees here are examples, indicative only.

Paying out after two years. You have made 24 payments. The balance is about $13,389, with 36 payments left. Those remaining payments add up to $15,997.68 ($444.38 x 36), so the interest still to come is about $2,609. If you pay out the $13,389, you save around $2,609 in interest. A $250 early repayment charge would still leave you about $2,359 ahead.

Paying out after four years. You have made 48 payments. The balance is about $5,003, with 12 payments left. Those payments add up to $5,332.56, so the interest still to come is only about $330. A $250 fee would eat most of it, leaving you about $80 ahead. If the fee were $330 or more, you would lose money by paying early.

This is the general pattern. Early in a loan there is a lot of interest to save, so a fee is a small price. Near the end, the interest left is small, and a fixed fee can outweigh it. The balance shrinks, so the saving shrinks too.

You can see the same effect in the car loan interest calculator: the interest on a five-year loan is front-loaded, with more of each early payment going to interest and less to the loan.

Questions to ask the lender

• What is the payout figure today, and until what date is it valid?
• Is there an early repayment charge? How is it worked out?
• Is there an admin or discharge fee on top?
• Can I make extra payments without a fee? Is there a limit?
• Is the fee different if I pay out in full or refinance with another lender?
• When will the security over the car be released after I pay?

Write the answers down. If the lender gives you a number by phone, ask for it by email.

Paying early when you are refinancing

If you are paying out because you have found a cheaper loan elsewhere, the early repayment charge goes into the calculation. A lower rate saves interest, but the fee comes out of the saving. Add the fee, plus any set-up fee on the new loan, and compare with what you would pay by staying. The worked numbers are in refinancing a car loan to lower repayments.

Paying early when you are selling

If you are selling the car, the loan has to be paid out as part of the sale. The lender usually has a security interest in the car until the loan is paid, so a buyer will want it discharged. Get the payout figure first and compare it with what the car is likely to sell for. If the sale price is less than the payout, you will need to cover the difference.

Other ways to cut interest without paying everything off

If the fee makes a full payout poor value, consider these.

• Small extra payments. If the contract allows it, even an extra $20 a week reduces the balance sooner. Confirm there is no charge first.
• A lump sum from a tax refund or a bonus, again if the contract allows it.
• Leave it. If you are within a year of the end and the fee is high, the loan may simply run out soon enough.

If you are paying early because things are tight

Sometimes the reason for wanting out is that repayments are too high, not that you have spare cash. Paying out in full is only an option if you have the money or a buyer. If you are struggling, talk to your lender before you miss a payment, since you may be able to apply for hardship help. See what to do when you can’t afford car repayments. MoneyTalks gives free budgeting help on 0800 345 123.

Looking at other loans

If your fee is high, it is worth knowing what else is out there next time. Lenders differ on early repayment terms, so compare the fees section of the disclosure statement, not just the rate. Our check is a referral service, not a lender or a dealer, and it sends one application and one soft credit check to a panel of NZ lenders. Nobody can promise approval, and lenders decide case by case. See the disclosure page for how it works.

Sources

• Consumer Protection NZ: loan for your car for fees and the disclosure statement
• Consumer Protection NZ: credit contracts in plain English for early repayment charges and updates on your account
• MoneyTalks for free budgeting help