Advice on early Repayment of Car Loan

Al_Barino

Hi,
I bought a car from a VW dealership last year, a 1.2 Polo, I pay a monthly amount and have the option of a balloon payment at the end to own the car, which i intend to do. I'm in the blessed position where I have the option to, and can afford to pay the whole car off in full at any point I wish, and while I wouldn't want to lose so much savings in one go I also have the option of paying extra to reduce the loan term/payment amounts.
So I plan to pay extra for a few months to get the monthly payments down to a smaller amount and then use that extra money I would then be saving to save up for the balloon payment at the end. My question is really is this worth it? Do I save money by paying off some early because of reduced interest charges on the loan or are these factored into the whole loan amount and I therefore pay the same amount regardless of whether I pay extra from month to month?

Nearlyold

If you make any sort of overpayment it reduces the amount owing and as interest is only charged on the outstanding balance it reduces the overall amount of interest you pay. Lenders can charge up to 2 months interest on any overpayment, you need to check the terms and conditions for your lenders policy.

You must tell the lender before you make any overpayment otherwise they may just treat it as a payment in advance.

BoGoF

What is the APR on the finance. Typical PCP rates are around 7-9% APR. If you have the money not paying it off is throwing money away.

foxy-stoat

Can you make a few overpayments on a PCP deal? If it is HP + balloon you maybe ok.

Nearlyold

foxy-stoat wrote: »

Can you make a few overpayments on a PCP deal? If it is HP + balloon you maybe ok.

If it's any form of loan regulated under the European Consumer Credit Directive lenders are obliged by law to accept overpayments.

chanz4

reducing the term brings the balloon fwd with vw

Al_Barino

Thanks for the replies everyone. I'm allowed to make over-payments but yes, only if i inform VW first and i can specify between whether i want to reduce the term of the loan or the monthly charges. I plan to reduce the payments and leave the term to give me longer to save up to make the balloon payment.
What I was mainly concerned by, was whether I am charged interest on the remaining outstanding loan amount or the entire loan amount regardless of how much I've paid off. If it is the former then there's no point in making over-payments. Also I'm aware I'm being quite vague, I don't have the paperwork to hand so can't give much more in the way of information!

Nearlyold

As already stated you will only be charged interest on the remaining outstanding loan amount, it would not be legal for the lender to still charge interest on money you no longer owe.

dano17439

Unless the interest rate of the PCP is between 0-2%, I would pay that off in a flash

Al_Barino

Ok thanks for the advice.

DrEskimo

Al_Barino wrote: »

I plan to reduce the payments and leave the term to give me longer to save up to make the balloon payment.

That would only be advisable if the interest you earn on saving the money in your bank is more than the interest you are being charged on the car finance loan.

If the interest on the car finance is high (i.e. anything above 5%) then reduce the term and keep paying the same amount (ideally keep overpaying as much as possible whenever possible too).