Early settlement

Definition

Early settlement is when a finance package or agreement is completed before the agreed duration of repayment period has been reached. This can either be the total payment made in full, or the agreement ended early without negatively affecting your credit score.

Why would someone choose an early settlement? 

Finance packages are an excellent way to spread the cost of a product or item into manageable monthly payments. If you cannot afford to buy a car outright, then a finance deal is a great way to ensure you can get the vehicle without having to wait and save. However, during your car finance agreement, your financial circumstances could change for the better. Then you may want to finish your finance package early so you have one less payment each month, and could potentially save money by not being charged interest on the full term of the agreement.

You can also find yourself in a position where you are not going to be able to afford the rest of the monthly payments, so you arrange an early settlement where you will pay a fee to remove yourself from the contract.

Are there any disadvantages to an early settlement?

Depending on the type of package you have and the finance provider, you may be charged for deciding to take an early settlement on your finance agreement. Finance providers make their money based on the interest charged for loaning you the money. So, by settling early, they are likely to make less money than they were anticipating.

At the start of the agreement, the finance provider will have set out in the terms and conditions how you can come to an early settlement. There may be a fixed charge, or a charge based on how much time is left on the agreement. It may also vary depending on whether you want to pay off the full agreement early, or you want to just end the agreement without paying it all off.

Will it affect my credit rating?

Taking advantage of an early settlement should not affect your credit rating, providing you go through the process as set out by your finance provider. Unlike a default, an early settlement is something agreed between both parties. Remember, finance providers have a responsibility to help their customers (providing they are Financial Conduct Authority approved lenders).

Finance providers look at how you have repaid finance agreements in the past when assessing your applications. If you have come to an early settlement by paying it all off, then it shows you have excellent affordability. However, if you came to an early settlement, then this may be looked at negatively. So early settlements are better if you are paying it all off early.

What should I do with an early settlement?

In all circumstances, you should contact the finance provider to explain the situation in full. They will be able to talk you through the process and any charges that you might incur. They may offer alternative options too, in order to keep you as a customer for longer or to help you meet the payments.