How a car finance settlement figure is worked out

A car finance settlement figure is the amount you need to pay to clear the agreement early. It is not simply the remaining monthly payments added up. It is what is left to pay with the interest you have not yet been charged taken off, so it is usually less than the sum of the instalments still due. It can also include an early repayment charge, which is a fee for paying the loan off ahead of schedule.

Under the Consumer Credit Act you are entitled to a settlement figure from your lender, and that figure could include a charge for repaying the loan early¹. The lender works it out to a set date, so the amount changes as time passes and as payments go in. Ask for it in writing and check the date it is calculated to.

The figure matters because you cannot sell or part-exchange a car that still has finance on it until the agreement is settled. With most types of car finance the borrowing is secured against the car, which means the lender owns it until you have paid off the agreement². That is why the settlement figure is the key number in any plan to sell, trade in or refinance the vehicle.

A settlement figure is what is left to pay, minus unearned interest

The starting point is the balance outstanding on the agreement. From that, the lender removes the interest that has not yet been earned, meaning the interest that would have applied to the months you are no longer going to pay. What remains is the capital still owed, plus any early repayment charge the agreement allows.

The Consumer Credit Act gives you the right to ask for this figure, and the lender must provide one that could include a charge for early repayment¹. The charge is not automatic and not the same everywhere. On an M&S Personal Loan, for example, settling early means a charge of 1 months' worth of interest, which is included in the settlement figure⁷. That is a personal loan rather than car finance, but it shows how a lender builds the charge into the number rather than billing it separately.

The figure is calculated to a specific date. Under the settlement information rules, where credit is repayable in instalments, the assumed settlement date is the date 28 days after the debtor's request for a statement is received, rather than the date of the first instalment due after 28 days have elapsed⁸. In practice that means the number you are quoted holds for a short window, and if you pay later the balance will have moved.

Two things can push the figure up rather than down. Arrears that have built up are added, and any charges the agreement allows, such as damage or excess mileage, can be included. The settlement figure is a snapshot, so it is worth asking what is in it before you pay.

Why you cannot sell the car without settling first

The finance company's name is on the car, not yours, until the agreement is cleared. With hire purchase, conditional sale, lease or hire agreements you cannot sell the car without the permission of the finance company, and the same applies to lease or hire agreements². With a logbook loan you cannot sell the car while the loan is outstanding². Selling a vehicle before a logbook loan is paid off is illegal⁹.

This is not a technicality. If you sell a car that still has finance on it, the buyer can end up with a vehicle the lender has a claim over, and you can end up owing the finance company the full balance even though the car has gone. The clean route is to settle first, then sell, or to let a dealer handle both at once.

A part-exchange is the common exception in practice. The dealer requests the settlement figure from the finance company, pays it off as part of the deal, and the remaining value of your car goes towards the next one. The finance company terminates the agreement and the balance is cleared. If you are within the 14-day cooling-off period instead, the dealer refunds the finance company rather than you directly, and the finance company pays you back your deposit plus any payments you have already made, minus deductions for fair usage¹⁰.

If you want to end the agreement without settling it in full, that is a different route. Voluntary termination lets you hand the car back once you have paid a set proportion of the agreement, and the two options have different costs. Our comparison of voluntary termination and early settlement sets them side by side.

What the lender's ownership means until the finance is cleared

With most types of car finance the borrowing is secured against the car, which means the lender owns it until you have paid off the agreement². Car finance is treated as a secured loan for this reason¹¹. Some car finance options are secured, with the vehicle serving as collateral¹².

The exact ownership position depends on the type of agreement:

• Hire purchase or conditional sale: the finance company owns the car until you have made the last payment². Vehicles bought this way do not belong to you until the last payment to the finance provider has been paid¹³.
• Lease or hire: the car remains the property of the finance company². You never own it; you hand it back at the end.
• Logbook loans: you hand ownership of your car to the finance company until you make the last payment². A bill of sale agreement transfers the legal ownership of your vehicle to the lender until you have paid the loan in full¹⁴.
• Bill of sale generally: the lender owns the goods until you pay off the loan¹⁵.

The practical effect is the same across all of them: until the settlement figure is paid, the car is not yours to sell, and the lender's interest comes first. On an HP plan, once you make the final repayment, including all interest, you own the car¹⁶. That is the moment ownership passes, whether you reach it by paying the instalments to the end or by settling early.

Mileage caps and other charges that can affect what you owe

Mileage is the charge most likely to surprise people at settlement. Mileage restrictions can apply, and the finance company can penalise you for using too much mileage¹⁷. Each extra mile typically costs around 10p, so underestimating your mileage by 3,000 miles a year on a four-year contract can add up⁵.

The Financial Ombudsman Service has looked at a case where a consumer said they were not aware of the mileage cap in their agreement. The finance provider said in its final response that the agreement clearly set out the annual mileage cap and so they were entitled to charge the customer for going over the allowed mileage¹⁸. The lesson is that the cap in the paperwork is what counts, so read it before you agree a settlement.

Other charges can also land on the balance:

• Damage or condition charges if the car is returned in a worse state than the agreement allows.
• Arrears already on the account, which are added to what you owe.
• Court and recovery costs if the lender has had to obtain a court order to repossess, which are added to your outstanding debt¹⁷.

If you end a hire purchase or conditional sale agreement yourself through voluntary termination rather than settling, you will owe up to half the agreement, plus any arrears and reasonable charges if the car is damaged¹⁹. That is a different calculation from a settlement figure, and it is worth comparing the two before deciding.

Who to ask, and how to get the figure

The finance company holds the agreement, so the finance company is who provides the settlement figure. The dealer or finance company is who you pay³, but the number itself comes from the lender. If you are part-exchanging, the dealer can request it on your behalf.

Ask for the figure in writing and check three things: the date it is calculated to, whether an early repayment charge is included, and whether any arrears, mileage or damage charges have been added. If the figure looks wrong, ask the lender to break it down before you pay.

If you are settling as part of a debt solution rather than a straightforward early repayment, the rules are different. Where a creditor agrees to accept a lump sum to write off a debt, the FCA rule is that if a firm accepts a customer's offer to settle a debt, it must communicate formally and unequivocally that the offer accompanied by the relevant payment has been accepted as settlement of the customer's liability²⁰. That is a full and final settlement, not a car finance settlement figure, and it has its own consequences for your credit file.

How settling early shows on your credit report

Settling car finance early closes the account. You can expect to see your account showing as having been closed, and your balance should change to 'zero' to show that there is nothing left to pay²¹. That is a normal, neutral to positive entry: it shows the borrowing was cleared.

It is not the same as a partial settlement. If a creditor did not issue a default notice before agreeing to write off part of a debt, they are likely to mark the account as a partial settlement²², which lenders view differently. A straightforward early settlement of car finance is not a write-off, so it should not carry that marker.

On the score itself, the general principle is that keeping up with payments on time and in full can help to boost your credit score in time²³. Settling early ends the account with the payments made, which is consistent with that. What damages a credit file is missed payments, defaults and county court judgments. If a CCJ is paid in full immediately it will not be recorded on your credit file²⁴, but once recorded, a judgment stays for its set period.

One caution: settling the car finance does not erase a poor payment history from earlier in the agreement. The account's record of how you managed it stays on file for its usual period, and the settlement is simply the final entry.

If you cannot pay the settlement figure

Not being able to clear the finance is not the end of the agreement. The instalments continue, and the car stays with you as long as you keep paying. The risk is that missed payments turn into arrears, and arrears can lead to repossession.

If money is tight, free and impartial help is available before things escalate. MoneyHelper offers guidance, and debt advice charities including StepChange and National Debtline can look at your whole situation. If you are considering consolidating the car finance into another loan, our guide to debt consolidation loans explains how that works and what it costs. If you are already behind, what to do if you can't repay a loan sets out the options, and what happens if you can't pay your car finance covers the car finance position specifically.

If you have a complaint about how the settlement figure was calculated or about a charge you were not told about, the finance company's complaints process comes first, and then the Financial Ombudsman Service. Our guide to complaining about a lender or finance company explains the steps.