How an early settlement figure is worked out
The lender takes the repayments you still have to make and discounts them back to today at the loan's rate. The difference between that figure and the remaining payments is the interest rebate.
On a regulated agreement the calculation follows the Consumer Credit Act rules, including a permitted settlement charge of up to 28 days' interest for loans under £7,000, or up to 58 days' interest for larger loans. The calculator lets you choose which period applies.
Worked example
A loan with £280 a month and 36 payments left at 9.9% has £10,080 of remaining payments. Discounted at the loan rate, the settlement figure is £8,875.84, so the interest rebate is £1,204.16.
With the 58-day settlement period, the charge is £88.76, making the total to settle £8,964.59. The net saving against making every remaining payment is £1,115.41.
When settling early does not pay
Late in the term most of the remaining payments are principal, so the rebate is small and the charge can outweigh it. On a flat-rate agreement the rebate may also be calculated differently from a reducing-balance loan.
Ask the lender for a written settlement quote, valid for a stated number of days, before you decide. The quote should show the rebate and any charge separately.
Inputs for the car loan early repayment calculator
Monthly repayment
Your regular monthly repayment, from your agreement or statement.
Repayments left
How many monthly repayments are still to come after the one you have just made.
Interest rate (APR)
The rate on your agreement. A fixed-rate quote is the usual case.
Settlement period
The permitted settlement charge period: 28 days for smaller loans, 58 days for larger ones.
Is the interest rate fixed?
Choose yes for a fixed-rate agreement; variable-rate quotes may differ.
CALCULATOR QUESTIONS
UK car loan early repayment calculator questions
Is it worth settling a car loan early?
It depends on how much interest is left. Early in the term the rebate is usually worthwhile; near the end the charge can cancel it out.
How much is the settlement charge?
Up to 28 or 58 days' interest depending on the loan size, which in this example is £88.76 on a £8,875.84 settlement.
Does settling early affect my credit score?
Settling a loan early usually helps, because the balance is cleared. Check that the lender records it as settled rather than closed with a balance.
Can I part-settle instead?
Many lenders allow partial overpayments. Ask whether the rebate is calculated the same way, and whether a charge applies.