Under Section 94 of the Consumer Credit Act 1974, early settlement of a regulated consumer credit agreement is your right at any point during the term, and you are entitled to a rebate that removes the future interest you would otherwise have paid. That covers most personal borrowing: loans, car finance, hire purchase, credit cards, and store credit. The mechanics are straightforward. The cost depends on whether your lender is entitled to add compensation, and how much.
Which Agreements This Right Covers
Section 94 applies to regulated consumer credit agreements. The borrower has to be an individual, a partnership of three or fewer partners, or an unincorporated body such as a club or society. Business lending over £25,000 is exempt where the agreement states the credit is wholly or predominantly for the borrower’s business.1Legislation.gov.uk. Explanatory Document for the Legislative Reform (Consumer Credit) Order 2008
Your credit agreement should say on its face whether it is regulated. If the agreement is unregulated, Section 94 gives you nothing; any right to settle early comes from the contract itself.
One boundary worth flagging. Agreements secured on land, including residential mortgages, still fall under Section 94 for full early repayment, but the rules run differently: notice has to be in writing, there is no statutory right to partial early repayment, and the compensation caps described below do not apply. Mortgage early repayment charges are governed by separate Financial Conduct Authority rules.2Legislation.gov.uk. Consumer Credit Act 1974 – Section 94
Requesting a Settlement Figure
Contact your lender and ask for a formal settlement statement. Give your name, account number, and the date you plan to pay. That date matters, because interest accrues daily on most agreements and the figure changes with it.
For agreements not secured on land, the request does not have to be in writing. A phone call is enough, and many lenders now handle it through an online portal or automated line. Putting the request in writing anyway creates a paper trail if the figure is later disputed.2Legislation.gov.uk. Consumer Credit Act 1974 – Section 94
How the Settlement Amount Is Calculated
The settlement amount is not the sum of your remaining monthly payments. You are entitled to a rebate that strips out the future interest you would have paid over the rest of the original term. The Consumer Credit (Early Settlement) Regulations 2004 set the formula.3Legislation.gov.uk. The Consumer Credit (Early Settlement) Regulations 2004
In essence, the regulations compare what you would pay over the remaining life of the loan against a discounted present value of those payments. The result is your outstanding principal plus interest accrued to the settlement date, minus the rebate. For most personal loans and car finance, the figure comes out well below the total of the remaining instalments.
Lenders cannot bolt on arbitrary exit fees beyond what the regulations and Section 95A permit. Payments you have already made that have not yet hit the account at the time of calculation must also be deducted.
When the Lender Can Charge Compensation
This is where the bill can grow. Even though you have the right to settle early, the lender may be entitled to compensation for lost interest. Section 95A sets the conditions and the cap.4Legislation.gov.uk. Consumer Credit Act 1974 – Section 95A
Compensation is only available to the lender if all four of the following are true:
- The agreement fixes the interest rate for a period, and you are settling during that fixed-rate period.
- The early payment, or the total of early payments made within any 12-month period, is more than £8,000.
- The agreement is not a current account overdraft facility.
- The settlement is not funded by a payment protection insurance payout.
Where those conditions are met, the amount is capped at the lower of two figures: 1% of the amount repaid early if more than one year remains on the agreement, or 0.5% if one year or less remains; and the total interest you would have paid between the date of your early payment and the original end date.
The statute also requires the charge to be fair and objectively justified. The lender should not automatically default to the maximum. If its actual loss from your early repayment is smaller than the cap, the charge should be smaller too. On a variable-rate agreement, or where the repayment is £8,000 or less, no compensation can be charged at all.4Legislation.gov.uk. Consumer Credit Act 1974 – Section 95A
Paying Off Part of the Balance Early
You do not have to clear the whole balance to use Section 94. For agreements not secured on land, you can pay off part of the debt early and reduce what you owe going forward. Give notice to the lender and make the payment within 28 days of the lender receiving that notice, or by a later date you specify in the notice itself. The notice does not have to be in writing.2Legislation.gov.uk. Consumer Credit Act 1974 – Section 94
After the payment goes through, the lender has to recalculate what you owe. You can then ask, in writing, for a statement showing how the payment changed your balance, any rebate applied, and the revised repayment schedule. The lender must provide this within seven working days.5Legislation.gov.uk. Consumer Credit Act 1974 – Section 97A
Even modest lump sums cut the principal on which future interest is charged, which can take months or years off the agreement.
Making the Payment and Closing the Account
Once you have the settlement figure, you typically have 28 days to pay before the quote expires and the lender has to recalculate. Most lenders accept bank transfer, debit card by phone, or cheque. Confirm the method before sending anything, because processing delays can push you past the deadline.
After the payment clears, ask the lender for written confirmation that the account is closed and the debt fully satisfied. Keep that letter indefinitely. Disputes about old debts do surface, and the letter ends them straight away.
For hire purchase or conditional sale, full settlement means the lender must transfer ownership of the goods to you. Until that final payment, the finance company legally owns the item. This matters most with vehicles: a car with outstanding finance attached cannot be sold cleanly, and anyone running an HPI check will see it.2Legislation.gov.uk. Consumer Credit Act 1974 – Section 94
If you overpay the settlement figure, the lender must refund the excess. The closure should also be reported to credit reference agencies as satisfied; most lenders update within one or two billing cycles, and you can raise it directly with the lender or the agency if the record does not shift.
Hire Purchase: Settle or Hand the Goods Back
On a hire purchase or conditional sale agreement, you have two different exit routes, and choosing the wrong one can be expensive.
Early settlement under Section 94 means you pay off what is still owed, minus the rebate, and keep the goods. Ownership passes to you. This is the right route when the item is worth more than the settlement figure, or when you just want to own it outright.
Voluntary termination under Section 99 is different. You hand the goods back and walk away, provided you have already paid at least half the total amount payable under the agreement. If you have not yet reached the halfway point, you pay the shortfall to bring your total payments up to 50% and then return the item. The goods have to be in reasonable condition, or the lender can claim for damage beyond fair wear and tear.6Legislation.gov.uk. Consumer Credit Act 1974 – Section 99
Voluntary termination makes sense when the item has depreciated below what you still owe, which is common with new cars in the first few years. If you owe £12,000 on a car worth £8,000, handing it back under Section 99 after paying half the total is often cheaper than settling the full balance. Run the numbers both ways before you commit.
If the Lender Gets It Wrong
Disputes usually come down to a settlement figure that looks too high, a compensation charge the borrower thinks is unfair, or a lender that will not produce the statement. Consumer credit has been regulated by the Financial Conduct Authority since April 2014.7Legislation.gov.uk. The Financial Services and Markets Act 2000 (Consumer Credit) Order 2014
Complain to the lender in writing first. The firm has to respond within eight weeks. If the answer is unsatisfactory, or nothing comes back, you can escalate to the Financial Ombudsman Service. The Ombudsman investigates free of charge and can issue decisions binding on the lender, including recalculations and refunds of overcharged compensation.
Where a Section 95A charge looks too high, ask the lender in writing to show how it was calculated and what actual cost it incurred. The statute requires the charge to be fair and objectively justified, not just inside the percentage cap. A lender that reaches straight for the maximum 1% without evidence that its cost was that high is arguably not meeting that test.4Legislation.gov.uk. Consumer Credit Act 1974 – Section 95A