Early Repayment Charges on Car Finance: All You Need to Know

You've come into some money. Your car finance has 18 months left. You want to pay it off and own the car outright.

But here's the surprise: your lender wants £800 in "early repayment charges" just for the privilege of paying them back EARLY.

Wait, what? You're literally giving them their money back sooner — why are they charging you?

Welcome to early repayment charges (ERCs) — the legal but frustrating fees that can add hundreds (sometimes thousands) to your settlement cost. Here's everything you need to know about how they work, when they apply, and how to avoid or minimise them.

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📌 What Are Early Repayment Charges?

Early repayment charges are fees your finance company charges when you pay off your car loan before the agreed end date. They're designed to compensate the lender for the interest they'll lose by you settling early.

They're also called:

• Early settlement fees

• Early termination charges

• Redemption fees

• Prepayment penalties

When they apply:

• Paying off finance in full before the end date

• Settling to sell or part-exchange the car

• Refinancing with another lender

• Sometimes even when making partial overpayments

How much they cost:

• Typically 1–2 months' interest

• Can be £200–£2,000+ depending on loan size

• Sometimes a flat fee (£50–£300)

• Occasionally a percentage of settlement amount (1–5%)

💷 Real Examples: What You'll Actually Pay

Example 1: Standard HP Agreement

Loan details:

• Original amount: £20,000

• APR: 8.9%

• Term: 48 months

• Monthly payment: £495

• 24 months remaining

Settlement calculation:

• Remaining balance: £10,500

• Interest rebate: -£450

• Early repayment charge: +£740 (2 months' interest)

• Total to settle:

  £10,790

Bottom line: You pay £740 for settling 24 months early.

Example 2: PCP with Large Balloon

Loan details:

• Car price: £30,000

• Balloon: £12,000

• Monthly payments: £350

• 12 months remaining

Settlement calculation:

• Remaining monthly payments: £4,200

• Balloon payment: £12,000

• Interest rebate: -£280

• Early repayment charge: +£890

• Total to settle:

  £16,810

Bottom line: Settling PCP early still includes the full balloon plus ERC.

Example 3: Low-Interest Deal (Manufacturer Subsidy)

Loan details:

• Amount: £25,000

• APR: 2.9% (subsidized)

• Term: 36 months

• 18 months remaining

Settlement calculation:

• Remaining balance: £13,200

• Interest rebate: -£145

• Early repayment charge: +£75

• Total to settle:

  £13,130

Bottom line: Low APR = low ERC (but still there).

🧮 How Early Repayment Charges Are Calculated

ERCs are calculated using a formula set by the Consumer Credit Act 1974. Here's how lenders typically do it:

Method 1: Actuarial Rebate (Most Common)

This is the legal maximum a lender can charge under UK law.

Formula:

1. Calculate total interest you were due to pay over full term

2. Calculate interest already paid

3. Remaining interest = Total interest - Interest paid

4. Rebate = Remaining interest × (Days early ÷ Days remaining)

5. ERC = Usually 1–2 months' worth of that remaining interest

Example:

• Total interest over 48 months: £3,800

• Interest paid in first 24 months: £2,200

• Remaining interest: £1,600

• Settling 24 months (730 days) early

• Rebate calculation: Complex actuarial formula

• ERC:Approximately £267–£533 (1–2 months)

Note: Under UK law, this charge is capped at 1% of the amount repaid, or 0.5% if less than 12 months remain

Method 2: Simple Interest Calculation

Some lenders use simpler math:

ERC = (Outstanding Balance × APR ÷ 12) × Number of Months Penalty

Example:

• Outstanding: £12,000

• APR: 9.9%

• Penalty: 2 months

• ERC = (£12,000 × 0.099 ÷ 12) × 2 = £198

Method 3: Flat Fee

Some agreements (especially older ones) charge a flat fee:

Common amounts:

• £50–£150 for loans under £10,000

• £150–£300 for loans £10,000–£25,000

• £300–£500 for loans over £25,000

📋 When Do Early Repayment Charges Apply?

✅ You WILL Pay ERCs When:

1. Settling Finance to Sell Privately Want to sell your car? You'll need to:

• Get settlement figure (includes ERC)

• Pay it off

• Then sell the car

2. Refinancing with Another Lender The new lender pays your settlement (including ERC) and you start a new agreement.

3. Part-Exchanging Before Contract End Dealer settles your finance (including ERC) as part of the trade-in.

4. Winning the Lottery (or Coming Into Money) Lucky you! But you'll still pay ERC to clear the debt early.

❌ You WON'T Pay ERCs When:

1. Making Final Regular Payment When you reach the natural end of your agreement, no ERC applies.

2. Returning Car Under PCP (Without Buying) Handing back a PCP at term end? No ERC — the balloon payment is optional.

3. Within Final Year (Some Lenders) A few lenders waive ERCs in the last 12 months. Check your agreement.

4. Overpaying Within Limits If your agreement allows up to £8,000/year overpayment (Consumer Credit Act protection for loans under £25,000), no ERC on those overpayments.

5. Death or Total Loss (Usually) Most lenders waive ERCs if the car is written off or the borrower dies (check specific terms).

💡 How to Avoid or Minimise Early Repayment Charges

1. Check Before You Borrow

When taking out finance, ask:

"Are there early repayment charges? How much? In what circumstances?"

What to look for:

• No ERC clauses (rare but they exist)

• Low ERCs (1 month interest vs 2 months)

• ERC waiver after certain period (e.g., waived in final 12 months)

• Overpayment allowances

2. Make Allowed Overpayments

Under Section 94 of the Consumer Credit Act, you can overpay up to £8,000 per year entirely fee-free. If you exceed this, any charge is legally capped at just 1% (or 0.5% in your final year) of the extra amount paid

How it works:

• Year 1: Overpay £8,000 (no ERC)

• Year 2: Overpay £8,000 (no ERC)

• Year 3: Overpay £4,000 then settle (ERC only on final settlement)

Savings: Potentially hundreds in avoided fees while clearing your debt significantly faster.

3. Wait Until Final Year

Some agreements waive ERCs in the last 12 months. Check yours.

4. Negotiate Settlement Amount

Yes, you can negotiate! Try:

"I'd like to settle early but the ERC is quite high. Can you reduce or waive it to encourage me to pay off the full balance now?"

• You've been a good customer (no missed payments)

• You're settling a large amount

• You mention refinancing elsewhere as alternative

5. Time Your Settlement Strategically

Bad timing: Just after a payment (you've paid that month's interest) Good timing: Just before a payment is due (minimize final month's interest)

Example:

• Payment due: 15th of each month

• Settle on 14th: You pay interest for 1 day of that month

• Settle on 16th: You pay interest for full month

6. Check for Calculation Errors

Lenders make mistakes. When you get your settlement figure:

Verify:

• Outstanding balance is correct

• Interest rebate calculated properly

• ERC matches your agreement terms

• No hidden admin fees

If wrong: Challenge it immediately in writing.

7. Use Voluntary Termination Instead (If Eligible)

If you've paid 50%+ of the total amount owed (including balloon), you can VT with no ERC under Section 99 of the Consumer Credit Act.

Example:

• Total amount payable: £22,000 (including balloon)

• 50% = £11,000

• You've paid: £11,500

• You can VT

  and return the car with no further payments (assuming good condition and within mileage)

🔍 Understanding Your Settlement Figure

When you request a settlement figure, it includes several components:

Components of a Settlement Figure:

1. Outstanding Principal The remaining amount you borrowed (excluding interest).

2. Remaining Interest Interest still owed on the loan.

3. Interest Rebate Reduction in interest because you're paying early (required by law).

4. Early Repayment Charge The penalty for settling early (typically 1–2 months' interest).

5. Administrative Fee (Sometimes) £10–£50 for processing the settlement.

Example Settlement Figure Breakdown:

Settlement Figure Request: 27 January 2026 Outstanding Principal: £11,450.00 Accrued Interest to Date: £234.00 Remaining Interest (Full Term): £2,145.00 Less: Interest Rebate: -£1,456.00 Early Repayment Charge (2 months): +£357.00 Admin Fee: +£25.00 TOTAL SETTLEMENT FIGURE: £10,610.00 (Valid until: 10 February 2026)

💳 How to Request a Settlement Figure

Step 1: Contact Your Lender

Call, email, or use online account:

Template email:

Subject: Settlement Figure Request - [Account Number]

Dear [Lender],

I am considering settling my car finance agreement early and require a settlement figure.

Account Number: [Your account number] Vehicle Registration: [Reg] Proposed Settlement Date: [Date]

*Please provide:

• Total settlement figure

• Breakdown of charges

• Validity period

• Payment instructions*

Thank you.

Step 2: Receive Quote (Usually Within 3–5 Days)

Lenders must provide this within a "reasonable time" — typically 3–5 working days.

Step 3: Review the Breakdown

Check all components are correct and match your agreement terms.

Step 4: Decide Whether to Proceed

Calculate if settling early makes financial sense after accounting for ERC.

Step 5: Make Payment (If Proceeding)

Payment methods:

• Bank transfer (most common)

• Debit card (some lenders)

• Cheque (slower)

Important: Settlement figures are valid for 7–30 days. Pay within this window or request a new quote.

🚦 Settlement vs Refinancing vs Voluntary Termination

When you want out of your car finance, you have three main options:

🔍 FAQs About Early Repayment Charges

Are early repayment charges legal? Yes, they're perfectly legal under UK consumer credit law as long as they're clearly stated in your agreement.

How much can lenders charge? Regulated by the Consumer Credit Act — typically capped at 1–2 months' interest. Must not exceed the interest you would have paid.

Can I avoid ERCs entirely? Only if your agreement specifically states no ERCs (rare) or you make allowed overpayments within annual limits.

Do all car finance agreements have ERCs? Most do, but not all. Always check your specific agreement.

Can I negotiate the ERC amount? Yes — some lenders will reduce or waive fees, especially for good customers.

What if I can't afford the settlement figure? Options: Keep paying normally, refinance to better terms, use voluntary termination (if eligible), or arrange overpayments.

Do ERCs apply to PCP balloon payments? No — the balloon is optional. But if you settle the entire agreement early (including balloon), ERCs may apply.

How long is a settlement figure valid? Usually 7–30 days. Check the quote — it will state the expiry date.

Can I make partial overpayments without ERCs? Yes — up to £8,000/year on regulated agreements under £25,000 (Section 94 protection).

What happens if I sell the car without settling first? You don't legally own it. The buyer won't get the V5C logbook and the lender can repossess the car from them. Always settle first.

💡 Top Tips for Dealing with Early Repayment Charges

1. Read Your Agreement NOW

Don't wait until you want to settle. Check your agreement today for:

• ERC clause and amounts

• Overpayment allowances

• Settlement process

• Any ERC waivers in final months

2. Do the Math

Calculate total cost including ERC:

Is it worth it?

• Settlement figure: £10,790

• vs Continuing to pay: £495 × 24 = £11,880

• Savings by settling: £1,090

• ERC cost: £740

• Net benefit: £350

If net benefit is small (under £500), continuing may be easier.

3. Request Settlement Figure in Writing

Always get it in writing with:

• Breakdown of all charges

• Validity date

• Payment instructions

• Confirmation no further charges will apply

4. Check for Calculation Errors

Lenders make mistakes. Verify:

• Outstanding balance matches your records

• Interest calculation is correct

• ERC matches agreement terms

5. Consider Partial Overpayment First

If you have a lump sum but not enough to settle fully:

• Make £8,000 overpayment (no ERC)

• Reduces balance and future interest

• Settle later when closer to end

6. Time It Right

Settle just before (not just after) your payment due date to minimize final month's interest.

7. Don't Assume You Can't Negotiate

Many lenders will reduce ERCs if you ask, especially if:

• You're settling a large amount

• You've been a reliable payer

• You mention considering keeping the loan otherwise

🧾 Final Thoughts

Early repayment charges are frustrating, but they're a legal reality of car finance. The key is knowing:

1. How much you'll pay — Get settlement figures before deciding

2. Whether it's worth it — Calculate net savings after ERC

3. How to minimise them— Use overpayment allowances, negotiate, time strategically

Remember:

• ERCs typically cost 1–2 months' interest (£200–£2,000)

• You can overpay a total of £8,000/year without ERC on regulated loans

• Settlement figures are valid for 7–30 days

• Always get settlement quotes in writing

• Negotiate — many lenders will reduce fees

Bottom line: Don't let ERCs stop you from settling if it makes financial sense. But do factor them into your calculations before committing.

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