Your right to settle early
Section 94 of the Consumer Credit Act 1974 gives you the right to repay a regulated loan early, in full or in part, whenever you like. The lender can’t refuse, and it must reduce the interest to reflect that you’re repaying sooner. This covers most personal loans and car finance. It doesn’t cover mortgages, which have their own rules and often early repayment charges.
Repaying early saves money because interest is charged on what you owe. Once the balance is gone, so is the interest on it.
How the settlement figure is worked out
The settlement figure is what you’d pay to clear the loan. The Early Settlement Regulations set how the interest reduction, or rebate, is worked out. In practice the figure is close to:
- the balance you still owe, after the payments you’ve made so far
- plus interest for 28 days, because the figure is worked out for a settlement date 28 days after you ask (regulation 5)
- plus up to a month more, which the lender is allowed to add on a loan of more than a year (regulation 6)
So on a longer loan, expect up to about 58 days’ extra interest. On a loan of a year or less, it’s 28 days. Lenders charge interest daily, so their exact figure can differ from an estimate by a few pounds.
An example
You borrow £10,000 over 60 months at 6.9% APR. The payment is £196.56 a month. After 12 payments you still owe £8,257.58.
- Adding 58 days’ interest gives a settlement figure of about £8,345.60.
- Carrying on would cost 48 more payments, £9,434.71 in all (the last payment is a little smaller).
- So settling saves about £1,089.11 of interest.
The later you settle, the less you save, because more of the interest has already been paid.
When the lender can charge compensation
On a fixed-rate loan, section 95A lets the lender claim compensation for the interest it loses, but only if you repay more than £8,000 early in any 12 months. It’s capped at:
- 1% of the amount repaid early, if more than a year of the loan is left, or
- 0.5% if a year or less is left,
and it can never be more than the interest you would have paid. In the example, settling £8,345.60 early is over £8,000 with more than a year left, so the lender could claim up to £83.46. Many lenders don’t charge it, but check your agreement. Below £8,000 there’s no compensation at all.
How to do it
- Ask the lender for a settlement figure. You can ask in writing under section 97, and the lender must reply with a statement of the amount, usually within 7 working days.
- Check the date the figure is valid until, and whether it includes any compensation.
- Pay by that date. Keep the confirmation that the loan is closed.
If you’re thinking of settling with money you’d otherwise need for bills, or borrowing elsewhere to do it, take a moment first. If repayments are hard to manage, MoneyHelper has free, confidential help.