You can get out of almost any car finance early, the bigger question is how much it will cost you to get out.
Early payout figures can vary greatly between different lenders and finance products for otherwise identical loans, particularly in the case of business use car loans and leasing as they are not regulated as heavily as consumer loans.
The difference can be thousands of dollars – even tens of thousands of dollars on larger loans.
Unfortunately, understanding how early payout figures are calculated is far from simple. To give you some idea, the various factors that play a role include:
1. Early payout “fees”: specific fixed or pro-rata fees that you must pay in the event of early termination. For example a flat $700 fee, or $10 for every month remaining in the loan, or similar.
2. Early payout “loss” charges: an amount that may be added to your payout figure by the lender to recoup a loss they suffer due to your the early termination. Typically, this loss would be related to differences between the lender’s fixed-rate funding cost at the start of your loan vs. at the point in time when you payout.
3. Interest amortisation method: how the lender amortises interest over the life of the loan (how the amount of principal and interest repaid each month is calculated), which affects how much of the principal you have paid down at the point of your early termination. Methods include reducing balance, Rule of 78, and so on.
4. Retained interest charges: whether the lender adds any future, unpaid interest to your payout figure – e.g., if you would have paid an extra $5,000 of interest if your loan ran full term, the lender may charge a “retained interest” penalty by adding some (or all) of this “future” $5,000 of interest to your payout figure. Retained interest is the charge most commonly being referred to when people talk about “payout penalties”, and they can be nasty.
5. Method of payout calculation: How the lender actually calculates early payout amounts – this may or may not not be related to the interest amortisation method the lender uses (if you request an amortisation schedule, for example). Some lenders calculate their early payouts based on the same method they use for interest amortisation (e.g. Rule of 78), whereas others use a completely different method (e.g. Net Present Value at a fixed discount rate).
All of these factors have to be considered together when comparing early payout scenarios between lender & loan options.
For example, Automotives Lease Packaging’s most popular car loans and leasing product, use the Rule of 78 to calculate their early termination figures – on face value this is bad, as the Rule of 78 biases interest towards the start of the loan, but because they don’t charge any retained interest or early payout fees overall their early payouts are very best in the industry.
Overall, the easiest way to compare early termination scenarios between different loan options is to ask a lender for an early payout schedule, which shows what your payout figure would be at each month of the loan – and make sure it’s an early payout schedule, not an amortisation schedule. Unfortunately very few providers can provide this however your other option is to deal with ALP who understands early payouts well and can provide you with “expert” advice.
Watch out for claims of “no early payout fees” especially on commercial loans – as plenty of lenders charge no early payout “fees”, but do charge hefty retained interest “penalties”.