What is a settlement figure and how is it calculated?

With some car finance agreements lasting up to six years, it’s important to be prepared for every eventuality.
 
Life can change a lot over that length of time, and sometimes, an agreement that was perfectly tailored to your circumstances when you signed it doesn’t feel so comfortable anymore.
 
So, what can you do if you need to end your finance agreement early?
 
No matter whether it’s the loan or your car that isn’t a great fit, there’s no need to wait until you reach the end of your term, even though you have a legally binding contract.
 
That’s where settlement figures come in.
 
This is the amount the lender will ask you to pay to bring your agreement to a premature end. Once you’ve paid to settle your finance, you’ll be the car’s legal owner and free to do whatever you like with it – sell it, trade it, or paint it with multicoloured polka dots if that’s your vibe!
 
It’s worth noting that terms and conditions will apply and there can be charges involved with settling your finance that might affect the final figure.
 
Read on to find out more about how settlement figures are calculated and whether it’s the right option for you:

What is a settlement figure?

The settlement figure is the amount you’ll need to pay to end your finance agreement early and become the car’s legal owner.
 
There are a whole host of reasons you might need to exit your agreement before the term officially ends. Perhaps you’re struggling to afford your finance and need to switch to a cheaper car with lower repayments; maybe you’ve had a second child and now need to swap your sports car for an SUV; or you’ve moved to the city centre and don’t need a car at all?
 
Whatever is driving your decision, you can request a settlement figure from your lender at any time. It will typically be made up of your outstanding loan balance plus any admin charges. Most lenders will also include an early termination fee too.

Settlement figures are usually valid for 28 days, but the number quoted could change if you make your normal monthly repayment in the meantime.

Does a settlement figure include final payment?

With a Personal Contract Purchase (PCP) finance agreement, your settlement figure will also include your final balloon payment.
 
You’ll usually only need to worry about the balloon payment when you reach the end of your PCP deal and you’ve fallen head over heels for your car. You’ll need to cover this final payment to become its legal owner and drive off into the sunset (Alexa, play Go Your Own Way)
 
It’s the way PCP deals work. Instead of borrowing the full purchase price of your new car, your loan will only cover the value the lender thinks your pride and joy will be projected to lose over the agreement term. Its future value – known as the Guaranteed Minimum Future Value or GMFV – will only be your responsibility if you decide to keep your car rather than return it or trade it in as a deposit in a new deal.
 
Unfortunately, this does mean settling PCP finance early can put a bigger dent in your savings than a Hire Purchase (HP) might – but there are ways you can spread the cost like refinance loans.

Why do you need a settlement figure?

Getting a settlement figure is the first step towards ending your finance early.
 
When you sign on the dotted line, you’ll be entering a legally binding contract that can last up to six years. Not only can a lot of things change in that time, but this means you can’t simply walk away from your deal.
 
With a PCP or HP loan, the car won’t be your property until the loan ends, and you’ve made all the required repayments. You can’t sell it or offer it in a part-exchange for a new model until you’ve settled the finance and made things official.

What are the benefits of early settlement?

Early settlement comes with several potential advantages, although that doesn’t mean it’s right for everyone.
 
In a perfect world, your car and finance agreement will fit perfectly with your life. Your payments will be affordable, and your car will continue to give you that fizz of excitement every time you start the engine. Hopefully, this might be the case at the start of your loan term, but now things might not be so idyllic. With an early settlement, you can end your agreement and make the switch to a new deal or car that better suits your circumstances.
 
You might also be able to save some money by skipping the interest due for the remainder of your loan. Most settlement figures will subtract the amount of interest you would’ve paid from your outstanding balance. If you have a lump sum saved or qualify for a personal loan with a lower interest rate, you could settle your car finance and use that extra cash for something you really want (last minute getaway to the Med anyone?)
 
On the other hand, early settlement isn’t a silver bullet solution. It’s worth keeping in mind that the added fees can sometimes outweigh any money you’ll save on interest. With a PCP deal, you’ll also be required to pay the balloon payment, there’s no option to simply return the car like there would be if you stuck it out to the end of the loan term.
 
There’s also the risk of negative equity. If your car has been put through its paces and depreciated (lost value) over time, it might now be worth less than the settlement figure. You could be left out of pocket if you choose to settle the finance and then decide to sell or part-exchange the car for a lower amount.

How do I request a settlement figure?

If you’re considering settling your finance early, you can contact your lender to request a settlement figure at any time.
 
Be prepared for them to ask you a few details including why you want to end the agreement early – they might ask you to confirm your request in writing too.
 
Once you receive your settlement figure it’ll usually be valid for 28 days. It’s worth knowing that if you make a payment after making your request, the figure might change. With this in mind, you could time your request immediately after your monthly payment is made to avoid any discrepancies.

Should I settle my car finance early?

There’s no right or wrong answer when choosing whether to settle your finance early or not. It all depends on you, your personal priorities, and the reason why you’re considering settling.
 
If you have the money to spend and want to avoid paying extra interest, you want to sell the car to earn some extra cash, or you’ve fallen in love with a new set of wheels and want to trade your car in for a newer model, settling your finance early might be the right choice for you.
 
However, the amount you’ll need to pay and the amount of interest you’ll save will depend on where you are in your loan term. If you only have a few months to go in an HP deal, for example, your settlement figure may be relatively low, but you also won’t save much in interest either. The way these loans are set up means that you’ll pay the most interest at the start of your loan. If the end is already in sight, you might be better off paying off the loan as normal rather than being hit with any possible extra charges like an early termination fee.
 
If you don’t have the funds available to pay the settlement figure (especially if it includes a PCP balloon payment), are in negative equity, or don’t think you’ll qualify for a better rate of interest if you try to refinance, opting for Voluntary Termination might be your preferred option.
 
Voluntary Termination is a legal right, set out under Section 99 of the Consumer Credit Act 1974, that allows you to end your loan and hand the car back to your lender at any point. You just need to tell the lender you want to voluntarily terminate and return the car.
 
It’s important to note that you’ll need to pay 50% of the total amount payable (including the balloon payment in a PCP). If you’ve made some payments, but not yet reached this point, you’ll need to pay the difference. If you’ve already paid over 50%, you can return the car without needing to pay anything more. Even so, extra charges might apply if the car is damaged beyond fair wear and tear and it's is important to note you will still be responsible for any arrears (missed payments) before the termination. 

Opting for Voluntary Termination shouldn’t impact your credit score, but it will be noted on your credit report and visible to other lenders. It’s worth keeping in mind that this could make lenders more hesitant to approve your finance application in the future, especially if you’ve exercised your right to Voluntary Termination more than once. 

Is there a car finance settlement calculator?

The Carmoola early settlement calculator is a handy online tool designed to help you estimate how much you might need to pay to bring your finance to an end early. It works for both HP and PCP loans; all you need to do is enter a few key details, click the button, and – hey presto – your estimated settlement figure will appear.
 
Keep in mind that this is just an estimate. Each lender operates differently and might calculate their settlement figure differently. They might have unique terms, interest rates, admin fees, and early termination charges that can affect the amount you need to pay.
 
As your settlement figure is unique to you and your finance agreement, you’ll need to contact your lender directly to find out exactly where you stand.