How do I settle my car finance early?

Your right to settle

On a regulated consumer credit agreement, section 94 of the Consumer Credit Act 1974 entitles you to settle at any time. You give notice and pay everything payable under the agreement, less the early-settlement rebate and plus any compensatory amount the lender is allowed to claim. The notice need not be in writing unless the agreement is secured on land.

On hire purchase or a PCP the notice can embody your exercise of the option to purchase, which is how you end up owning the car. On a PCP that means the final payment is part of what you pay.

Get the figure first

Ask the lender for a settlement statement. It must show the amount needed to clear the agreement and how it is worked out, including the rebate and any compensatory amount, and it is due within 7 working days of your request. You can ask by phone unless the agreement is secured on land, but the lender need not answer a second request made within one month of one it has already answered.

The figure is worked out to a settlement date, which is 28 days after the request unless you ask for a later one, so if you plan to pay on a particular day, say so.

The rebate

Section 95 and the Consumer Credit (Early Settlement) Regulations 2004 give you a rebate of the charges for credit when you settle early. Regulation 2 says the lender must allow a rebate at least equal to the one the regulations calculate, so the agreement can give you more. The settlement statement shows whichever is higher and says the rebate was calculated having regard to the 2004 Regulations.

The regulations’ rebate does not apply where you end a hire purchase agreement by voluntary termination under section 99 instead.

When the lender can add a charge

If your agreement is not secured on land, fixes the interest rate for a period and you settle during it, the lender may claim a compensatory amount equal to the cost it has incurred as a direct result of being repaid early. Section 95A allows this when the payment you make exceeds £8,000 (or the payments in any 12 month period add up to more than £8,000), the agreement is not an overdraft-type arrangement and the money is not paid from payment protection insurance.

The amount must be fair and objectively justified. It cannot be more than the lower of 1% of the payment (0.5% if there is one year or less left until the date the agreement was due to end) and the interest you would have paid for the rest of the term.

Paying off part of the debt

You can also pay off part of the debt. Under section 94(3) to (5), if the agreement is not secured on land, you give notice and make the payment within 28 days of the lender receiving it, or by a later date the notice names. If you ask, the lender must then give you a statement of the effect of the payment within 7 working days (section 97A).

Settling is not handing the car back

Settling means paying what is due so that you keep the car. Ending a hire purchase or PCP agreement by handing the car back under section 99 is a separate right with its own rules on what you pay, covered in our answer on handing a car back. Sections 94, 95, 95A, 97 and 97A apply across the UK, including Northern Ireland.