When taking out car finance, whether it be a personal car loan or business vehicle finance, fees will be applicable. These charges vary from lender to lender and include loan establishment fees and possibly other charges. But in addition to the fees applicable when first setting up your loan, there are fees that can apply when the loan is finalised. In general terms, these are referred to as ‘break fees’.
Break fees are, by definition, a fee charged by the lender when a borrower breaks the finance contract. Most car loans, both personal and business, are set up for a fixed loan term. When the loan is finalised before that scheduled end of the loan term, the lender may charge break fees. When establishing a motor vehicle loan contract, borrowers should be advised of this by their broker or lender.
When do vehicle finance break fees apply?
Break fees most typically occur under two main scenarios where a loan is finalised early – when the borrower voluntarily chooses to make extra payments and when the vehicle is sold while still under finance.
Making additional car loan repayments:
- In some circumstances, a borrower may choose to make additional payments on their car loan, over and above the scheduled monthly payments. This is permitted with Secured and Unsecured Personal Car Loans and most commercial finance facilities. Making extra payments is less commonly found regarding business vehicle finance.
- An individual may make extra payments when they have additional funds. By making extra payments, the total amount outstanding is reduced and the loan. If the borrower maintains the established payment schedule in addition to making extra payments, then the loan would be finalised before the fixed term ends.
- The outcome of making additional payments is a saving on the total interest payable on the loan but break fees would apply. Interest on consumer loans is calculated at the daily interest rate and then charged against the loan monthly. So any additional payments made in a month would affect a reduction in overall interest.
- If a borrower chooses to put additional funds into their car loan account, these monies cannot be withdrawn at a later time. But they can be designated against future monthly repayments.
Selling Your Vehicle ‘under finance’:
- When a car is sold while money is still owed on the car loan, it is known as ‘selling under finance’. For example, selling or trading in a car say 3 years into a 5-year secured car loan. The seller needs to finalise the existing loan commitment before completing the sale.
- With secured loans, lenders report their interest in the vehicle to the PPSR. Buyers of used cars are strongly advised to check the PPSR and ensure all monies owed on a vehicle are finalised before buying.
- When a loan is finalised in this way, before the fixed loan term, then break fees would apply.
- Variations between consumer loans and business finance can occur as ASIC regulates consumer finance but all commercial finance is not subject to the same regulations.
Calculating Car Loan Break Fees
When finalising a car loan early, that is before the end of the term, borrowers should contact their lender for a ‘payout figure’. This is the total amount that will need to be paid to finalise the loan. It will include the break fees.
Consumer loan break fees are calculated based on:
- The balance of money outstanding the car loan.
- The amount of time that is remaining on the fixed term of the car loan term.
- Consumer finance is regulated by ASIC.
Individual lenders may vary but as a general ‘rule of thumb’ calculation of consumer loan break fees:
- The total fee usually varies between $600-$900 per loan and charged based on pro-rata, meaning the number of monthly payments is still outstanding.
- For example, if the fee charged by a lender was $750 for a 60-month car loan that would be $12.50 per month. If the car is sold with 2 years of payments outstanding that would be 24 months multiplied by $12.50 which would be $300.
- Any break fees applicable should be considered against the interest saved.
Commercial finance is not regulated by ASIC and break fees on motor vehicle finance contracts will depend on the requirements and guidelines of individual banks and lenders.
Business vehicle break fees can be applied via several calculation methods including:
- The Rule of 78: This refers to how interest is applied to a commercial loan over the life of the finance contract. The break fee charged would take into account how much of the finance principal (total initial loan amount) is still to be finalised concerning the interest payable.
- Discount rate on finance contract balance.
- A percentage interest rebate.
Your Jade Car Loans consultant will advise you of the break fees applicable to your particular loan type when arranging your motor vehicle finance. If you consider paying out a loan before the end of the loan term through additional payments or resale, contact your lender for an exact payout figure.
Feel free to use our car loan calculator to receive an estimate on potential repayments.
Contact 1300 000 003 for cheap interest rate personal and business motor vehicle finance.
DISCLAIMER: IN REGARD TO MISREPRESENTATIONS AND ERRORS CONTAINED IN THE MATERIAL AS PRESENTED, LIABILITY IS NOT ACCEPTED. THE DETAILS AND CONTENT IS PROVIDED FOR CAR BUYERS AND INDIVIDUALS AND BUSINESS SEEKING FINANCE PURELY AS GENERAL INFORMATION. THIS IS NOT PROVIDED AS THE ONLY SOURCE OF FINANCIAL INFORMATION. ANYONE THAT CONSIDERS THAT NEED FINANCIAL ADVICE ABOUT THEIR SPECIFIC REQUIREMENTS SHOULD SEEK THEIR OWN FINANCIAL ADVISOR.