Some fees are required as part of the process, while others depend on how you manage your agreement. Understanding these costs can help you budget effectively and avoid unexpected charges.
Why are fees charged in car finance?
Fees exist in car finance because lenders, brokers, and dealerships provide services that come with administrative costs. For example, setting up a finance agreement involves paperwork, credit checks, and legal processes, all of which require time and resources.
Some fees also act as penalties to discourage late payments or early termination of an agreement. While some of these costs are fixed and unavoidable, others may be reduced or avoided if you follow the terms of your contract.
Common types of fees in car finance
There are several types of fees you may come across when financing a car. Each serves a different purpose and can affect the overall cost of your agreement.
Arrangement fee
One of the most common charges is the arrangement fee, which is sometimes applied when a lender sets up your finance plan. This can be included in your monthly repayments or required as a separate upfront payment.
Option to purchase fee
Another cost you might encounter is the option to purchase fee, which applies if you take out a Personal Contract Purchase (PCP) or Hire Purchase (HP) agreement and decide to buy the car at the end of the term.
Early settlement fee
If you choose to settle your loan early, an early settlement fee may apply. This charge compensates the lender for the interest they would have earned over the full term. Similarly, if you miss a payment, a late payment fee could be added, and this may also impact your credit score.
Excess mileage fee
For those using PCP, an excess mileage charge can apply if you exceed the agreed mileage limit. This is because the lender bases the car’s future value on how much it is driven. If you return the car in a condition that does not meet fair wear and tear guidelines, damage or wear and tear charges may be applied.
How to manage and reduce fees
While some fees are unavoidable, there are ways to minimise or prevent certain charges. Checking the terms of your agreement before signing can help you spot any hidden costs. If you are opting for PCP, setting a realistic mileage limit will reduce the risk of excess mileage charges. Keeping up with your monthly payments is also important, as late fees can quickly add up. Setting up a direct debit can ensure payments are made on time.
Regular maintenance of the vehicle can help prevent wear and tear charges at the end of a lease or PCP agreement. If you are considering early repayment, it’s worth checking whether an early settlement fee applies and weighing up whether the savings on interest outweigh the cost of settling the finance early.
Final notes
A fee in car finance refers to any additional charge that comes with taking out, managing, or completing a finance agreement. Some of these fees are standard, while others depend on how you handle your repayments and the condition of the vehicle at the end of the term. By understanding the potential costs and planning accordingly, you can avoid unnecessary expenses and ensure your car finance deal works in your favour.
