How Your Car Finance Settlement Figure Is Worked Out (HP and PCP)

Thinking about paying off your car finance early, selling the car, or switching to something cheaper? The first number you need is your settlement figure: the amount that clears the agreement in full today. Lenders make it sound like a mysterious quote only they can produce, but for regulated agreements the calculation method is set by law, and you can estimate it yourself before you ever pick up the phone.

What a settlement figure is

It's not simply your remaining payments added together. When you settle early, the lender must give back some of the interest you would have paid over the rest of the term, because they're getting their money back sooner. The settlement figure is your outstanding balance plus a little extra interest (more on that below), minus that rebate.

Your right to settle early, and the rebate that comes with it, is written into the Consumer Credit Act 1974. The rebate itself is calculated using the actuarial method laid down in the Consumer Credit (Early Settlement) Regulations 2004. Every regulated HP, PCP and personal loan agreement in the UK follows the same rules, which is why an online calculator can get very close to the lender's official quote.

The 28 and 58 day rule

One quirk surprises almost everyone: the settlement figure is slightly higher than the balance you'd expect. The regulations let the lender calculate the rebate as if you were settling 28 days after your request, and for agreements longer than a year they can add another 30 days on top. In effect, up to 58 days of extra interest. It exists to compensate lenders for the admin of early settlement, and it's why your quote is dated and expires, usually after ten days to four weeks.

A worked example

Say you borrowed £15,000 over 48 months at 9.9% APR to buy a car on HP. The payment works out around £377 a month. Two years in, you've made 24 payments totalling about £9,040, and 24 more remain, also £9,040.

Ring up for a settlement figure, though, and you won't be quoted £9,040. The actuarial balance after 24 payments is about £8,200, and with up to 58 days of interest added the quote lands somewhere near £8,330. Settling saves you roughly £700 of future interest compared with paying the remaining instalments month by month.

The earlier in the agreement you settle, the bigger the saving, because interest is front-loaded across the term: each early payment is mostly interest, each later one mostly capital.

Why PCP settlement figures feel so high

On PCP the monthly payments only cover part of the car's value; the rest sits in the balloon payment (the guaranteed future value) due at the end. Your settlement figure includes that balloon in full.

So on a £25,000 PCP with a £12,000 balloon, you can be two years into the agreement and still owe more than £15,000, despite having paid £8,000 or £9,000 in. Nothing has gone wrong. The balloon was always going to be there, and settling early means paying it early. Whether the car is worth more than the settlement figure (equity you can put towards the next car) or less (negative equity) is the number that actually matters if you're planning to sell or part-exchange.

Settlement isn't your only exit

If your agreement is regulated HP or PCP, you also have a statutory right of voluntary termination: once you've paid half of the total amount payable, you can hand the car back and owe nothing more, provided it's in reasonable condition and within any mileage terms. If your settlement figure is well above what the car is worth, voluntary termination is sometimes the cheaper exit. Compare both numbers before deciding.

Partial settlements are worth knowing about too. You can pay off a lump sum without clearing the whole agreement, and the same rebate rules apply to the amount you pay. The lender will then reduce either your monthly payment or the term.

Estimate yours before you call

Your lender must give you a settlement figure free of charge whenever you ask. But it helps to know what the number should look like before it arrives, especially if you're negotiating a part-exchange against it.

Our early settlement calculator uses the same actuarial method as the regulations, so you can estimate a quote from your loan amount, APR and how many payments you've made. If you want the figure for a specific date, the settlement by date calculator handles that. And for older or non-regulated agreements that still use the Rule of 78, there's a Rule of 78 calculator too.

If the lender's official quote comes back wildly different from your estimate, ask them to break it down. Mistakes are rare, but fees and insurance products bundled into the agreement are not, and it pays to know exactly what you're being charged to leave.