Early settlement

Under the Consumer Credit Act 1974 the borrower can settle a regulated consumer credit agreement early by giving notice to the lender and paying the amount due less a rebate. The borrower is also entitled to information about the amount needed to settle.

The Consumer Credit (Early Settlement) Regulations 2004 provide for the calculation of the rebate due to the borrower when an agreement is settled early or otherwise ended. The regulations came into force on 31 May 2005, with transitional provisions.

The Consumer Credit (Settlement Information) Regulations 1983, as amended by the 2004 regulations, set down the form and content of settlement statements. A statement must be provided within seven working days of the borrower's request.

The 2004 regulations and some later amendments can be found on the OPSI website.

Failure to comply with the regulations can lead to the OFT or local authority trading standards services taking enforcement action against the lender, using powers in Part 8 of the Enterprise Act 2002.

In addition, if the lender fails to provide a correct settlement statement he is not entitled to enforce the agreement until the statement is provided, and if the breach continues for a month this is a criminal offence.

The Consumer Credit (Early Settlement) Regulations

The Regulations apply to all regulated fixed-sum credit agreements, with certain exceptions. They do not apply to running-account credit agreements, or certain equity release mortgages. They also do not apply where a hire-purchase or conditional sale agreement is terminated by the consumer under section 99 of the Act.

The lender must provide a rebate on early settlement which is at least as favourable to the borrower as that calculated in accordance with the formula in regulation 4. This is intended to ensure that the borrower repays the outstanding capital, but not future interest or charges. The lender can omit certain items from the calculation, including brokerage fees and sums payable under certain linked transactions.

The settlement date for the purposes of calculating the rebate will generally be 28 days after the borrower notifies the lender of his intention to settle early. This may be deferred by a further month in the case of agreements lasting for more than one year. Special rules apply in the case of home credit agreements pursuant to the Competition Commission's order following its market investigation.

The Regulations apply to new agreements from 31 May 2005, plus pre-existing agreements of 10 years or less. If an agreement was for more than 10 years, the new rules will apply from 31 May 2010. In the meantime such agreements remain subject to the Consumer Credit (Rebate on Early Settlement) Regulations 1983.

The Department for Business, Enterprise and Regulatory Reform (BERR) has issued guidance on the regulations. Download the BERR guidance (pdf 150 kb).

If there are any queries on the regulations these should be addressed to credit.guidance@oft.gsi.gov.uk.

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