A borrower under a regulated consumer credit agreement, such as a personal loan or a short-term loan, has a statutory right to repay it early. Section 94 of the Consumer Credit Act 1974, which the legislation marks as applying across the United Kingdom, sets the right out, and the Consumer Credit (Early Settlement) Regulations 2004 deal with the rebate. Whether an agreement is regulated should be checked on the agreement itself.
The statutory right to settle early
Section 94(1) entitles the debtor under a regulated consumer credit agreement, at any time, to discharge the whole debt by giving notice to the creditor and paying everything owed under the agreement, less any rebate allowable under section 95. Section 94(6) says a notice of this kind need not be in writing unless the agreement is secured on land. Citizens Advice nonetheless advises writing to the lender to ask for an “early settlement figure”, the total needed to clear the loan.
Citizens Advice says the types of agreement usually covered by the Act include personal loans, credit cards, payday loans, hire purchase, catalogue accounts and store cards, and that a regulated agreement should say so at the top of its first page. Its guidance is written for England, and the equivalent pages for Scotland, Wales and Northern Ireland are separate.
The 28-day settlement date
Regulation 5 of the 2004 Regulations treats the settlement date for calculating the rebate as the date 28 days after the creditor received the borrower’s notice, or any later date specified in the notice, provided the borrower pays by that date. Citizens Advice puts it in plain terms: after asking for a settlement figure, the borrower has 28 days from the lender’s receipt of the request to pay in full, and asking for a figure does not commit the borrower to going ahead.
Interest rebates
Regulation 2 requires the creditor to allow a rebate at least equal to the amount calculated under the Regulations when early settlement takes place. Early settlement includes discharge under section 94(1), refinancing, breach of the agreement, or any other reason that makes the debt payable before the time fixed by the agreement. The rebate is calculated by a formula in the Regulations, so the saving depends on how much of the term remains and how charges were structured.
Regulation 2(2) lists agreements outside the rebate rule, including agreements under which no payments of items in the total charge for credit fall due after the settlement date, running-account credit such as credit cards, and certain land mortgages. Citizens Advice says the total amount payable is reduced when a covered agreement is paid off early.
Paying off part of the debt
Section 94(3) and (4) give a similar right to part-settle an agreement that is not secured on land. The borrower gives notice, pays part of the amount due before the time fixed by the agreement and makes that payment within 28 days of the creditor receiving the notice, or by a later date named in it. Under section 94(5) the debt is then discharged by the amount paid plus any rebate under section 95.
Citizens Advice notes that the saving on interest and charges from a part payment is smaller than from a full settlement, and suggests asking how much the payment will reduce the total loan and future payments, since it may be possible to keep the same monthly payment over a shorter period.
Limits on early repayment compensation
Section 95A allows a creditor to claim a compensatory amount only in narrow circumstances. The agreement must fix the rate of interest for a period, the payment under section 94 must exceed £8,000 (or the total in any 12-month period must exceed that figure), the agreement must not be an overdraft-type debtor-creditor agreement, and the payment must not come from payment protection insurance proceeds. The amount must be fair and objectively justified.
It is also capped at the lower of a percentage of the amount repaid early, being 1% where more than a year of the term remains and 0.5% where a year or less remains, and the interest that would have been paid between the payment date and the date fixed by the agreement. For a short-term loan far below £8,000, this compensation power does not arise.
FAQs
Must an early settlement request be in writing?
Section 94(6) says notice need not be in writing unless the agreement is secured on land, but Citizens Advice recommends writing so that the request and the lender’s figure are recorded.
Does asking for a settlement figure oblige me to pay?
No. Citizens Advice says the borrower can carry on with the usual payments instead.
Does this apply in Scotland and Northern Ireland?
Sections 94 to 95A are marked as applying across the United Kingdom, though Citizens Advice publishes separate advice pages for each nation.
Bottom line
A regulated borrower can repay all or part of a loan early by giving notice and paying by the settlement date, normally 28 days after the lender receives the notice, and is entitled to a rebate under the 2004 Regulations. Compensation to the lender is confined to fixed-rate agreements where more than £8,000 is repaid in 12 months, and is capped. This is general information, not financial advice; the lender’s written settlement figure should be checked against the agreement.
Sources
- legislation.gov.uk, “Consumer Credit Act 1974, section 94: Right to complete payments ahead of time”
- legislation.gov.uk, “Consumer Credit Act 1974, section 95: Rebate on early settlement”
- legislation.gov.uk, “Consumer Credit Act 1974, section 95A: Compensatory amount”
- legislation.gov.uk, “The Consumer Credit (Early Settlement) Regulations 2004, regulation 2: Entitlement to rebate”
- legislation.gov.uk, “The Consumer Credit (Early Settlement) Regulations 2004, regulation 5: Settlement date”
- Citizens Advice, “Paying off a credit agreement early”