Say you took out a five-year car loan, and two years in, you have the money to clear it. A bonus lands in your account, or you sell the car. Before you hand the money over, you'll want to know if the lender can still charge you the rest of the interest.
Yes, you can pay off a personal car loan at any time, and the lender can't charge you the rest of the interest. You pay what you owe on the day and, if your contract charges one, a reasonable admin fee. On a fixed rate, you may also pay a fee for what a change in interest rates costs the lender.
The rules are in the Credit Contracts and Consumer Finance Act 2003. They cover consumer loans, which the Act defines as money a person borrows mainly for personal, domestic, or household use (section 11). If you borrowed for the car mainly for a business, they don't cover you.
Can a lender stop you paying off your car loan early?
No. Section 50 of the Act says a lender must accept full repayment from you at any time, and your contract can't rule it out.
It doesn't matter where the money comes from: savings, a bonus, the sale of the car, or a new loan from another lender that clears this one. The lender doesn't get a say in when you leave.
What do you pay to clear a car loan early?
At most three things: what you owe on the day, a fee for the lender's admin costs, and a fee for the lender's loss. Section 51 caps each one.
What you owe on the day
The balance, plus the interest and fees built up to the day you pay, and none after it (section 51(2)). It works like a final power bill: the meter is read on the day you move out.
An admin fee
To cover the lender's costs of closing the loan. The Act bans any unreasonable credit fee (sections 41 and 51). Lenders have to keep records of how they worked out each fee.
A fee for the lender's loss
It can't be more than a reasonable estimate of what the lender loses when you repay early. The lender works it out with a method set in regulations or one written into your contract (section 54).
Doesn't the lender just charge you the interest you'd have paid?
No. The loss fee covers only what a change in interest rates costs the lender, on the fixed-rate part of your loan.
It's a fair worry. A lender that fixed your rate for five years planned on five years of interest, and the Act does let it charge for a real loss when you leave early. On a fixed rate, that fee can be large.
Section 43 sets the limit. In its words, the loss must be one "that is a result of differences in interest rates". So the fee only comes from rates moving since you fixed yours.
How much it comes to depends on two things: what rates have done since you signed, and how long your fixed rate had left to run. Two people clearing the same size of loan on the same day can be quoted different amounts. Each amount has to come from the method in their own contract.
How do you find out what early repayment will cost before you sign?
The lender sets out the cost in the disclosure statement it gives you before you sign.
Step 1: Find the part on full repayment. It may be headed full prepayment. By law it has to spell out how the lender works out its loss, and whether it uses the method set in regulations (Schedule 1 of the Act).
Step 2: Note the fee for repaying early.
Step 3: Check what the contract says about extra payments along the way: whether the lender can turn them down, and whether a fee applies.
Step 4: Ask the lender, or your adviser, what clearing the loan two years in would cost on these terms.
If you might clear the loan early, compare these terms along with three numbers: the weekly cost, how long the loan runs, and the total you'll repay.
Paying early: the other questions
Can I pay extra each week instead of clearing the whole loan?
Usually, yes. A lender must accept part payments unless the contract expressly lets it turn them down, and it has to refund any it turns down as soon as practicable (section 49). On a fixed rate, the lender can also charge a fee on an extra payment, capped at the lender's loss on that payment (section 43). Before you pay extra, read what your contract says about early repayment.
What happens to insurance I financed with the loan?
Consumer credit insurance financed under the loan ends when you repay in full, unless it covers other loans or gives you another benefit (section 53). If the lender arranged it, a share of the premium comes off what you pay to clear the loan (section 52). The same goes for a repayment waiver or an extended warranty bought on the loan (sections 52A and 52B).
Back at the two-year mark
Back to that bonus, two years into a five-year loan. Before you move a dollar, email your lender. Ask for the amount needed to repay the loan in full on a date you name, and how the lender worked it out. Section 24 of the Act gives you the right to ask for exactly that, in writing.
Put that amount beside what you'd still pay if you kept the loan, and you'll see in dollars what clearing it early saves.
If you're choosing your next loan, a better finance adviser can give you your three numbers before you commit: the weekly cost, how long it runs, and the total you'll repay. Apply online → or Talk to our team →
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Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
