Car Finance Settlement Calculator

How to use this calculator

1. Count payments made, not months elapsedA deferred first payment or a payment holiday means the two differ, and the settlement depends on how many instalments have actually been paid.
2. Include the balloon on a PCPThe optional final payment is part of the total borrowed and must be settled too, which is why PCP settlements are much larger than the monthly payments suggest.
3. Use the APR from the agreementIt is on the front of the credit agreement. The rebate is calculated at that rate, so a guess produces a guess.
4. Check the voluntary termination lineOnce you have paid half the total amount payable, handing the car back may cost nothing at all — often a far better outcome than settling.

You are buying back the interest, not the car

Settling car finance early means repaying the outstanding capital plus whatever interest has genuinely accrued, rather than the full contractual total.

The principle is straightforward. If you borrowed money for four years and repay after two, you should not pay four years of interest. The Consumer Credit Act gives you a statutory right to settle early and to receive a rebate.

What is less obvious is how the rebate is calculated, and why it is smaller than people expect.

The regulations discount the remaining payments back to the settlement date at the agreement's own interest rate. That produces the present value of what you still owe, which is the settlement figure.

But the regulations also allow the lender to add a deferment of up to two months before doing that calculation — effectively treating the settlement as happening a month or two later than it does. That is entirely lawful and it is why a settlement figure is always a little higher than a straight present value.

The larger reason settlements disappoint is front-loaded interest. On any amortising agreement, the early payments are mostly interest and the later ones mostly capital. So after half the term you have paid well over half the interest and rather less than half the capital.

That means settling at the halfway point does not save half the interest. It saves considerably less, and the outstanding balance is higher than the number of payments made would suggest.

PCP agreements compound this. The monthly payments are held down by deferring a large balloon to the end, so the capital repaid each month is small. A PCP two thirds through its term can still have a settlement figure close to what the car is worth, which is why negative equity is so common.

The lender must give you a settlement figure on request, and it is normally valid for a set period — usually 28 days. Ask for it in writing. A figure quoted on the phone is not binding and the amount changes daily as interest accrues.

Worked example: £320 a month, 20 of 48 paid

An agreement of 48 monthly payments of £320 at 9.9% APR, with 20 payments made and no balloon.

Remaining payments: 28 × £320 = £8,960.

That is the amount you would pay if you simply continued to the end.

Discounting those 28 payments back to today at the monthly equivalent of 9.9% APR, with one month of statutory deferment, gives a settlement figure of £7,947.47.

So the rebate for settling early is £1,012.53.

You save £1,012.53 against continuing — real money, but only 11.3% of what remains, despite settling with 58% of the term still to run.

That gap is front-loaded interest doing its work. Most of the interest on this agreement was charged in the first two years, and it has already been paid.

Now add a balloon. If the same agreement were a PCP with a £6,000 final payment, the outstanding total becomes £14,960 and the settlement figure rises to £12,723.58 — because the balloon is capital you have not repaid and it has to be settled too.

On a PCP the settlement figure is therefore far larger relative to the monthly payment than on hire purchase, and comparing the two on monthly cost alone is misleading.

Now the part exchange. If a dealer offers £8,500 for the car against a £7,947 settlement, you have £552.53 of equity to put toward the next one. If they offer £7,000, you are £947 in negative equity, and rolling that into a new agreement carries the shortfall forward with interest.

And the voluntary termination position. Half the total amount payable on this agreement is £7,680. You have paid 20 × £320 = £6,400, so you would need £1,280 more — four further payments — to reach the halfway point.

At that point you could hand the car back under section 99 and owe nothing further, provided it is in fair condition with reasonable mileage. On these numbers that is worth considering seriously against a £7,947 settlement.

Settlement through the term

£320 a month over 48 months at 9.9% APR with one month of deferment. The last column is the point: the rebate shrinks as a proportion of what is left, because there is progressively less future interest to give back. Settling near the end of an agreement saves almost nothing, which is why the decision is usually about the car rather than the finance.

Voluntary termination, and when it beats settling

Section 99 of the Consumer Credit Act gives a statutory right to terminate a regulated hire purchase or PCP agreement early. Once you have paid half the total amount payable, you can return the vehicle and owe nothing further.

That is a right, not a request. The lender cannot refuse it, and it applies whatever the car is worth.

The conditions are that you must have paid half the total amount payable — including the balloon on a PCP, and including any fees — and the car must be in reasonable condition for its age and mileage. Excessive damage or mileage well beyond the contracted allowance can attract a charge.

On a PCP with a large balloon, the halfway point often falls very late. Because the balloon counts toward the total amount payable but is not paid until the end, you can reach the final month without having paid half. Always check the arithmetic rather than assuming it arrives at the midpoint of the term.

Voluntary termination is worth serious consideration whenever the settlement figure exceeds the car's value. Handing back a car in negative equity and walking away is precisely what the right exists for.

It does appear on your credit file as terminated rather than settled, which some lenders view less favourably, though it is not a default and should not be recorded as one. Any lender treating it as a default has made an error worth challenging.

On negative equity more broadly: it is normal in the first half of any agreement and particularly pronounced on PCP. Dealers routinely offer to roll a shortfall into a new agreement, which solves nothing — it adds the old shortfall to the new borrowing and compounds it into the next car.

If you are in negative equity and want to change cars, the honest options are to keep the car until the position improves, to pay the shortfall in cash, or on a PCP to hand it back at the end and walk away from the equity question entirely.

One more route worth knowing: if the finance was mis-sold, or if a discretionary commission arrangement inflated your rate, you may have a complaint. That is a separate matter from settlement and does not affect the figure the lender quotes today.

Finally, always request the official settlement figure before acting. This calculation follows the statutory method, but agreements vary, fees differ, and only the lender's own figure is binding.

Assumptions and limitations

• Models the statutory approach; lenders apply their own conventions within it
• Does not include settlement administration fees, which some agreements charge
• Assumes payments are current except for any arrears entered
• Does not model payment holidays or deferred first payments
• Voluntary termination figures assume the car is in fair condition and within mileage
• Does not assess whether finance was mis-sold, which is a separate matter
• Not financial advice — the lender's own settlement figure is binding

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