Your settlement figure is essentially the balance remaining on your loan at any given point, minus any future interest you would have paid if you had continued making the regular monthly payments.
It’s important to note that the settlement figure isn’t just your outstanding balance. Finance companies typically calculate this figure by considering the amount of interest you would save by paying off your loan early and potentially applying an early repayment charge (also known as an exit fee).
How is the settlement figure calculated?
The calculation of a settlement figure takes into account several factors. Your finance provider will start by calculating how much you still owe on the loan, including both the capital and interest. They’ll then subtract any future interest you would have paid had you kept making the monthly repayments for the remainder of the term.
In most cases, there’s also a small fee for early settlement, which is often equivalent to one or two months’ worth of interest. This means that while you won’t pay all the interest originally expected, you may still have to cover a bit more than just the outstanding balance.
If you’re within the first half of your repayment period, your settlement figure could be higher than what you expect, as you’ve likely been paying off more interest than capital at this stage of the loan. But towards the end of the finance agreement, your settlement figure should be much closer to your remaining balance.
Why would you request a settlement figure?
There are several reasons why you might want to request a settlement figure. The most common one is to pay off your car finance early.
- Paying it off early can reduce the total amount of interest you pay, freeing you from your monthly payments and allowing you to own your car outright.
- Perhaps you’re thinking of selling the car or upgrading to a newer model, and you need to know how much you owe to settle the finance before you can proceed.
- Alternatively, if you’re considering refinancing, it’s essential to know your settlement figure so you can arrange a new deal with another lender.
How do you get a settlement figure?
Getting a settlement figure is simple. All you need to do is contact your finance provider and request it. Most companies offer this service online or over the phone, and in some cases, you can even find it in your online account if you manage your payments digitally.
Once you’ve made your request, the finance company will typically provide the settlement figure, which is valid for a limited period (usually 28 days). This figure is the amount you need to pay within that time frame to clear your loan.
What happens after paying the settlement figure?
If you choose to pay the settlement figure, you’ll essentially be clearing your loan early. Once the finance company receives the full payment, they’ll close the account, and you’ll be free from the finance agreement. You’ll also fully own the car at this point if you’ve been on a hire purchase (HP) or personal contract purchase (PCP) plan.
If you’ve been leasing the car, however, you may need to return the vehicle, depending on the type of finance agreement you’ve signed. Always check the terms and conditions to understand the full impact of settling your finance early.
Is it worth paying your settlement figure early?
Whether it’s worth paying off your settlement figure early depends on your financial situation and future plans. If you have the funds to clear the loan and want to save on future interest, it might make sense. Paying off your car finance early means you’ll be rid of your monthly payments and could save money in the long run.
It is also important to weigh this against any early repayment charges. In some cases, the amount you save on interest might not be enough to justify the settlement, especially if your loan is nearing the end of its term. Always do the maths and consider your financial goals before making a decision.
🚗 Read more: How to pay off car finance early.
In summary
Understanding your settlement figure on car finance is crucial when considering paying off your loan early or making changes to your agreement. It gives you a clear picture of how much is left to pay and whether it’s worth clearing the loan sooner than expected.
By keeping an eye on your finances and knowing the ins and outs of your agreement, you can make the right choice for your situation.
If you’re ever unsure, don’t hesitate to contact your finance provider for clarification or advice. They can walk you through the details and help you determine the best approach for your car finance.
