From the request to the last payment
The Code sets out the steps for a fixed-term loan such as a car loan (continuing credit contracts are treated differently).
Ask in writing
The borrower, or a guarantor, asks the lender in writing for a statement of the amount needed to pay out the contract as at a date they choose. If asked, the lender must also list the items that make up the amount.
The statement arrives within 7 days
The lender must give it within 7 days after the day the request is given, and it must say that the amount may change depending on the date it is paid.
Read what the figure is made of
The payout amount is the amount of credit, plus interest charges and all other fees and charges payable up to the date of termination, reasonable enforcement expenses, and early termination charges if the contract provides for them, less payments already made and any rebate of consumer credit insurance premium.
If no statement comes
If the lender does not provide one after a proper request, a court may, on the borrower’s or guarantor’s application, determine the payout amount, and the contract is discharged if that amount is offered within the period set.
Interest in that list runs “up to the date of termination”. In this guide’s reading, that is where the saving in paying early comes from: interest that would have been charged for the remaining months is not part of the payout.
Insurance bought with the loan
Where consumer credit insurance was financed under the loan, the Code ends that insurance when the credit contract ends, and requires the lender to pay or credit the borrower a proportionate rebate of the premium. The rule applies despite anything the insurance contract says. Other add-on products sold with a car have their own terms; Moneysmart’s add-on car insurance page covers them.
The fee for leaving early
Moneysmart links the fee to the rate type. A variable rate car loan usually has no early exit fee, which it says may suit someone planning extra repayments or paying the loan back early. Fixed rate loans may charge a fee for repaying early, and Moneysmart’s suggestion for anyone wanting to pay a loan off quickly is to check for one before choosing.
When a fee looks too large
The Code lets a court annul or reduce an early termination fee or a prepayment fee that it finds unconscionable. Such a fee is unconscionable if it exceeds a reasonable estimate of the lender’s loss from the early termination or prepayment, including its average reasonable administrative costs.
An early repayment fee is also outside the comparison rate: the prescribed long-form warning names it as a cost that is “not included in the comparison rate but may influence the cost of the loan”.
Extra repayments, an illustration
Paying extra can reduce the total interest and pay a loan off sooner, Moneysmart says, with a check first for any fees or limits on extra repayments. The figures below are an illustration with round numbers, not a market rate: $30,000 borrowed at 8% a year over five years, interest worked out monthly at one twelfth of the yearly rate, no fees, and no fee for paying extra. Totals are rounded to the dollar.
| Repayment | Each month | Paid off after | Total interest | Total repaid |
|---|---|---|---|---|
| The scheduled repayment | $608.29 | 60 months | $6,498 | $36,498 |
| $100 a month extra | $708.29 | 50 months | $5,369 | $35,369 |
The last of the 50 payments is smaller than the rest, because only the balance left is paid. Moneysmart’s personal loan calculator shows the same effect for other figures.
- Interest saved in the illustration$1,128by paying $100 a month extra
- Months saved1050 instead of 60
- Still owing after two years$19,412on the scheduled repayments, before any payout fees
The last readout shows how slowly the balance falls at first: in this illustration more of each early repayment goes to interest than in later years, so after two of the five years almost two thirds of the $30,000 is still owed. A payout figure at that point would start from that balance and add whatever the contract and section 82 allow.
Selling the car before the loan ends
When a car is sold to meet a loan, Moneysmart’s caution applies: the price it brings might not cover the full debt. The same is true of a loan with a balloon payment, where a large part of the debt is still owed until the end.
If repayments get hard instead
Paying early is the easy case. ASIC’s advice to anyone having difficulty with a car loan is to contact the lender early, seek financial counselling and understand their rights, and Moneysmart describes financial counselling as free and confidential.