Paying off a loan early and settlement figures

Most personal loans can be cleared before the end of the term. Citizens Advice states that you can normally pay off a personal loan at any time before the end of the term, and that you may be entitled to a refund of interest if you do¹. The right comes from the Consumer Credit Act 1974 and the rules made under it, and it applies whether you want to clear the whole debt or just pay down part of it. The standard information sheet that mortgage and loan lenders must give you puts it plainly: "You have the possibility (the right to) to repay this loan early, either fully or partially."²

What early settlement costs depends on the loan. On unsecured personal loans, the charge is typically one or two months' interest³, and the interest you would otherwise have paid is cut by a statutory rebate⁴. This page explains how the right works, what a settlement figure contains, how the charge and rebate are worked out, how to request and pay a figure, and what happens with car finance, credit files and the planned reform of the Consumer Credit Act.

Your right to pay off a loan early

The Consumer Credit Act 1974 gives a borrower the right to discharge a regulated credit agreement early, and the Act remains in force: the revised text is up to date with all changes known to be in force on or before 28 September 2026⁷. The right is not limited to paying everything off. Regulations made in 2010, implementing the European Consumer Credit Directive, state that "The consumer has the right to repay an agreement early in part and to receive a reduction in the total cost of the credit as a result, in addition to the existing right to repay early in full"⁵. The same regulations confirm that consumers "will have the opportunity to repay their credit early at any time, while the creditor can ask for a fair and objectively-justified compensation"⁸.

In practice this means a lender cannot refuse an early repayment, cannot invent an arbitrary penalty, and must reduce the total cost of the credit to reflect the time you are not borrowing the money. What the lender can do is ask for compensation, within limits, for the costs it incurs when a loan ends early. Those limits, and how the reduction in interest is worked out, are covered in the sections below.

The right applies to regulated credit agreements. Whether an agreement is regulated matters, because unregulated agreements carry none of these protections. Business borrowing above certain thresholds can fall outside the Act: a common reason for an agreement not being regulated is where more than £25,000 was borrowed and the agreement is for business purposes⁹. Most consumer personal loans, car finance agreements and credit cards taken out by individuals are regulated.

If you have just taken out the loan and are having second thoughts, that is a different right: the 14-day right to withdraw lets you cancel within a short window, and your rights under the Consumer Credit Act set out the protections that run alongside the right to repay early.

What a settlement figure includes

A settlement figure is the amount that clears the loan on a given date. The rules define early settlement broadly: it takes place where the debt is discharged or becomes payable before the time fixed by the agreement, whether under the Act, on refinancing, on breach of the agreement, or for any other reason, and also where the debt is discharged in part¹⁰. So the same machinery covers paying the loan off completely, paying off a chunk of it, and situations where the whole balance falls due early, such as after a default.

The figure itself is made up of:

• the outstanding capital, that is, the amount borrowed that has not yet been repaid
• interest accrued to the settlement date
• any charges that have been added to the account, such as arrears charges
• minus the statutory rebate of interest that would otherwise have run to the end of the term⁴
• plus any early repayment charge the contract allows³

The lender must tell you what the figure is. Once you request it, "The creditor must then provide you with a settlement statement within seven days of receiving your request"⁴. The statement sits within a wider set of rights to information about your account: under the Act you can ask for a statement of account, which should be signed by the creditor and tell you how much you have paid, how much you still owe, and what you still have to pay and when¹¹. You can also ask for a copy of your original agreement, and the 'true copy' must contain all the terms and conditions from it, information about any changes made, and your name and address at the time you took it out¹¹.

Early repayment charges: usually one to two months' interest

The charge for settling a personal loan early is usually modest. Which? notes of personal loans that "It isn't unusual to be charged one or two months' interest."³ The charge takes one of two forms: "This could be either a flat percentage of the total loan or a fixed fee"¹². On most unsecured personal loans the charge is capped by the rules made under the Consumer Credit Directive, which allow the creditor to ask only for "fair and objectively-justified compensation"⁸.

Charges can be structured to fall over time. On some agreements with fixed early repayment charges, they are applied on a sliding scale: for example, "they might start at 10% of the value of the loan in year one, reducing to 5% after you've had the loan for five years"¹³. That example comes from equity release, where charges run much higher and for much longer than on personal loans, but it shows the shape a sliding scale can take. Before settling, check your original agreement or ask the lender in writing what charge applies on the date you intend to pay.

Other forms of borrowing have their own charges, and they can be far larger:

Mortgages sit under different rules entirely. The FCA's glossary defines a mortgage early repayment charge as "a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract"¹⁷. Mortgage charges are typically a percentage of the outstanding balance and can apply for years, which is why the mortgages section covers them separately. For loans generally, loan fees and charges sets out the other costs to check before settling.

The statutory interest rebate cuts what you owe

When a loan is settled early, the lender does not simply charge all the interest that was scheduled for the full term. Which? explains: "Instead, the total amount of interest that would have been payable is reduced by a statutory 'rebate'."¹⁸ The same wording appears across its guidance on the Consumer Credit Act and on cancelling and settling loans⁴. The rebate is a legal requirement, not a goodwill gesture: it exists because you will not have use of the lender's money for the full term, so the lender cannot keep interest for months that never happen.

The rebate is worked out using a formula in the Consumer Credit (Rebate on Early Settlement) Regulations, and the settlement date used in the calculation matters. The regulations' explanatory note describes how the assumed settlement date is fixed: in a case where the credit is repayable in instalments, the settlement date assumed for calculating the amount 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 elapsed²⁰. In other words, the figure you are quoted assumes you pay roughly a month after asking for it, and the rebate is calculated to that date.

The practical effect is that settling early saves most of the interest still to run, not all of it. You keep paying interest for the notice period built into the calculation, and you may pay a charge on top. Whether settling beats leaving the loan running depends on the interest still to run, the charge, and the rebate: the bigger the gap between the settlement figure and the balance you would otherwise pay over the remaining term, the clearer the saving.

When early repayment is penalty-free

Some lenders charge nothing at all for early settlement. Credit union loans are the clearest example: one credit union states that "You can pay off your loan early, make additional lump sum repayments or increase your regular repayments, without a penalty"²¹. Many credit unions operate this way, and credit union borrowing explains how these lenders work and how their loans differ from high-street personal loans.

Even where a charge exists, it is not a free-for-all. The Directive-based rules allow the creditor to ask only for fair and objectively justified compensation, which in practice limits charges on regulated agreements to a small proportion of the interest still to run⁸. A charge that exceeds what the rules allow can be challenged, first with the lender and then, if the lender does not put it right, with the Financial Ombudsman Service.

A few specialist products carry their own rules. A Green Deal plan, attached to a property's electricity bill, can be paid off early "but there may be extra costs"¹⁶. Government equity loans, such as Help to Buy, require you to settle any outstanding payments in full or set up a payment plan with the customer service team before you can repay²². If your borrowing is anything other than a standard personal loan, check the specific terms before assuming the personal loan norms apply.

Paying off part of a loan or all of it

The right to repay early in part is as real as the right to repay in full. The 2010 regulations state that the consumer has the right to repay an agreement early in part and to receive a reduction in the total cost of the credit as a result⁵. A partial repayment reduces the balance, and with it the interest that runs afterwards; the lender recalculates what remains, either shortening the term or reducing the monthly payment, depending on its terms and what you ask for.

Overpayments, meaning extra payments on top of the regular one rather than a single lump sum clearing the account, work the same way. Where the contract allows them without penalty, as the credit union example above shows²¹, each overpayment cuts the balance and the interest charged on it. Where the contract charges for early settlement, ask the lender how it treats overpayments, because some agreements treat a large overpayment as a part-settlement that triggers the charge while others allow an annual allowance.

It is worth distinguishing a planned part-repayment from a full and final settlement offer, which is a different thing: a negotiated offer to close a debt for less than the full balance, usually made when someone cannot pay in full. Debt charities give worked examples of these offers, such as £1,800 offered to a loan creditor on a £4,500 debt, and £480 offered on a £1,200 catalogue debt²³. Those offers are for problem debts and need the creditor's agreement in writing; they are not the same as the statutory right to clear a loan early, which requires no negotiation at all. If you are in that situation, what to do if you can't repay a loan is the right starting point.

How to request a settlement figure and pay it

The process is short, and the deadlines are fixed by the rules:

1. Ask the lender for a settlement statement, by phone, online or in writing. Keep a note of the date you asked.
2. The creditor must provide the settlement statement within seven days of receiving your request⁴.
3. Read the figure and its expiry date. The calculation assumes settlement 28 days after the lender received your request⁶.
4. Pay the amount by the date on the statement, using a payment method the lender accepts.
5. Ask for written confirmation that the agreement has ended and nothing further is owed.

A few practical points make the process smoother. Give the lender the exact date you plan to pay if you know it, so the figure can be calculated to that date rather than the assumed one. Check whether any monthly payment is due between the request and the payment, and ask the lender how it will be treated. If you are using funds from elsewhere, such as savings or a family gift, make sure they will clear in time, because a payment that arrives after the settlement date leaves a small residual balance accruing interest.

If the lender misses the seven-day deadline, sends a figure that does not show the rebate, or applies a charge that looks wrong, complain to it first. Lenders must handle complaints properly, and if the complaint is not resolved, the Financial Ombudsman Service can look at it, free. Complaining about a lender or finance company walks through the process.

Settlement figures last 28 days

A settlement figure is not a permanent quote. The regulations fix the settlement date for the calculation as "the date falling 28 days after the date on which the notice was received by the creditor, or any later date specified as the date of early settlement in the notice, if the debtor pays the amount in question (less any rebate allowable under these Regulations) not later than that date"⁶. Pay by that date and the quoted amount clears the loan, rebate included. Pay later, and interest continues to run, so the amount needed will be higher than the figure you were given.

The same 28-day rule applies where the repayment is not in instalments, and the regulations' note confirms the assumed settlement date of 28 days after the request is received for instalment credit too²⁰. If your plans change and you cannot pay within the window, simply ask for a fresh statement: the seven-day deadline applies to each request⁴.

One trap to avoid is cancelling a direct debit before the loan is actually settled. If the settlement payment is delayed for any reason and the regular payment then bounces, the missed payment could be recorded as arrears, and arrears are what damage a credit file. Keep the direct debit in place until the lender confirms in writing that the account is closed, then cancel it.

Car finance and hire purchase: settling or handing back

Car finance works differently from a personal loan, because the finance company usually owns the car for part or all of the agreement. StepChange explains: "When you buy a car with a hire purchase (HP) or conditional sale agreement, the finance company owns the car until you have made the last payment"²⁵. Settling the finance early means paying off the balance, including any option-to-purchase fee, and the ownership then passes to you.

There is also a separate statutory route for ending hire purchase and conditional sale agreements early, without settling in full. The Consumer Credit Act, in sections 99 and 100, gives consumers the right to terminate most hire purchase and conditional sale agreements before the final payment is due, and caps the amount due based on the final price and the amount already paid²⁶. Under this route the car can be returned, which ends the agreement, but payments already made are not refunded; where more than half of the agreement has been paid, nothing more is due²⁵. Where less than half has been paid, a further amount is due to reach the halfway point.

Handing the car back is a very different decision from settling, and the two are compared in voluntary termination or early settlement of car finance. The dedicated pages on hire purchase, how car finance works and how a car finance settlement figure is worked out cover each route in detail.

Missing payments on car finance has its own consequences. The finance company can take the car back if you miss payments, and it can do this without going to court if you have paid less than a third of the agreement²⁵. Before that point, the Act requires the creditor to issue a default notice, and you will normally have a minimum of 14 days to fix things⁹. If you cannot pay your car finance, what happens if you can't pay your car finance sets out the options.

What paying off early does to your credit score

Paying off a loan early does not damage your credit file. A settled account is recorded as settled, and a loan cleared on time or early is a closed account with no arrears. What does move a score is missed payments: "One late payment on a credit card or loan can dent your score by as much as 130 points, according to Experian"²⁷. That is the risk in the window between requesting a settlement figure and the payment clearing, which is why keeping the direct debit in place until settlement is confirmed matters.

Two things can surprise people after settling. First, a closed account eventually drops out of the calculation of your credit history, and a loan that was being paid reliably each month was demonstrating a payment record that stops once the account closes. Second, if the loan was one of only one or two active credit accounts, settling it leaves a thinner file. Neither effect is a reason to keep a loan running and paying interest for it, but it explains why a score can dip slightly after a settlement. How loans affect your credit file covers the mechanics, and credit scores and credit reports explains what a score is and is not.

If the account still shows as open, or as owing money, some weeks after you paid it, contact the lender with your confirmation of settlement and ask it to correct the record with the credit reference agencies. If it does not, that is a complaint, and the Financial Ombudsman Service can order a correction.

Planned changes to the Consumer Credit Act

The rights on this page rest on the Consumer Credit Act 1974 and the regulations made under it, and that framework is set to change. In May 2026 the government announced it would repeal much of the law governing consumer credit, with some provisions recast in FCA rules²⁸. The government's criticism of the Act is that it is "Prescriptive, confusing and duplicative, in requiring credit providers to communicate with customers in technical language which they may not understand"²⁸.

Nothing has been repealed yet. The revised Act is up to date with all changes known to be in force on or before 28 September 2026⁷, and the legislation notes that there are changes that may be brought into force at a future date²⁹. Until replacement rules take effect, the existing rights continue: the right to repay early in full or in part, the statutory rebate, the seven-day settlement statement deadline and the 28-day settlement window all stand. Financial regulation in the UK tracks how the reform programme develops.

Where to get help

Free, impartial help is available at every stage. Citizens Advice can explain your rights and help with a complaint about a lender¹. National Debtline provides free guidance on settlement offers and on dealing with creditors, including its guides on full and final settlement offers²³. StepChange, a debt advice charity, covers car finance debt, secured loans and remortgaging to pay off debt²⁵. The Financial Ombudsman Service is the free body that can settle disputes between consumers and lenders, including over settlement figures, rebates and early repayment charges.

If the underlying problem is not the mechanics of settling but the affordability of the loan itself, what to do if you can't repay a loan and the debt section set out the options, from breathing space to debt solutions, and where to get free advice on each.