Table of Contents
- What Is an Early Settlement?
- Why Would You Want to Settle Early?
- How Early Settlements Work
- Which Finance Products Can Be Settled Early?
- Pros of Settling Early
- Cons to Think About
- Example: Early Settlement in Action
- What to Ask Before Settling Early
- Can It Affect Your Credit Score?
- Final Thoughts
Key Takeaways
- Early settlement means paying off a loan before the end of the term
- You could save money on interest, but watch out for fees
- You can settle business loans, hire purchase, leasing, tax loans, and more
- Always ask your lender for a written settlement figure
- Make sure settling early won’t leave your business short on cash
What Is an Early Settlement?
An early settlement is when you decide to pay off your loan or finance agreement before the agreed time. Let’s say you took out a loan for five years. But after three years, your business has extra cash, and you want to clear the remaining balance now. That’s an early settlement.
People and businesses often settle early to reduce debt, cut interest costs, or free up cash flow for other things. But it’s not always as simple as paying what’s left. Some lenders may charge a fee or include interest you would have paid later. So, it’s always worth checking the details.
Why Would You Want to Settle Early?
There are many reasons someone might want to settle early. Maybe your business had a strong quarter and there’s extra money in the bank. Or maybe you’re refinancing and want to clean up existing loans first. Some people just like knowing they don’t owe anyone anything. That peace of mind can be priceless.
Sometimes, settling early can save money. When you pay off a loan sooner, you might avoid paying all the interest that would have built up over the rest of the loan term. That can be a big win, especially for longer-term agreements.
How Early Settlements Work
Every lender has their own rules. In general, if you want to make an early settlement, you’ll ask the lender for a settlement figure. This is the exact amount you need to pay to close the loan completely. This figure includes the remaining balance plus any fees or interest that may still apply.
Depending on the type of finance you’ve taken — like a hire purchase, lease agreement, or business loan — the settlement figure may vary. Some lenders offer a discount on future interest if you settle early. Others don’t, and might even charge what’s called an early repayment charge or exit fee. This is why it’s important to read the terms or ask your broker to explain them clearly.
Which Finance Products Can Be Settled Early?
Not all finance products work the same, but many types of business finance do allow for early settlement. Here are the most common ones:
Business Loans
Most business loans can be settled early. You pay off the remaining balance, and you might save on interest. Some lenders offer a discount on early repayment, while others may charge a fee.
Asset Finance (like Hire Purchase or Equipment Loans)
Hire purchase agreements can usually be settled early. If your business financed machinery, vehicles, or equipment this way, you can ask for a settlement figure at any time. The earlier you settle, the more you may save in interest — though some agreements include a “minimum interest” charge.
Lease Agreements (including Finance Lease and Operating Lease)
Leases can sometimes be settled early, but the process is a little different. Instead of owning the asset at the end, you’re paying for its use. So if you want to end the lease early, you may still have to pay most of the remaining rentals — or negotiate with the funder.
Invoice Finance (like Invoice Discounting or Factoring)
Invoice finance isn’t a “loan” in the usual sense, but if you want to exit an agreement early — say you’re switching providers or no longer need the service — there may be settlement fees involved. It’s best to check your contract terms.
VAT and Corporation Tax Loans
These short-term loans help spread the cost of tax bills. Since they’re typically set over 3 to 12 months, you can often settle them early if cash flow improves. Some lenders may allow you to save on interest, while others will have a fixed repayment schedule.
Pros of Settling Early
There are some great benefits to settling a loan early. Here are a few:
- You save on interest: The sooner you pay it off, the less interest you may owe.
- You own the asset outright: If your agreement involves an asset, like a vehicle or machinery, you gain full ownership sooner.
- You have more financial freedom: One less payment to worry about every month.
- You reduce debt: That’s always a good thing — especially when planning to apply for other types of finance.
Cons to Think About
As with anything in finance, early settlements aren’t always the best move. Here’s why:
- You will be charged a fee: Some agreements include early repayment charges.
- Cash flow could be affected: Tying up money now might limit what you can do later.
- You may not save as much as you think: If the interest is front-loaded (meaning you paid most of it early on), then there may not be much left to save.
Always look at the total cost to settle compared to the original repayment schedule. Sometimes it’s worth waiting; sometimes it’s not.
Example: Early Settlement in Action
Let’s say you run a logistics company and financed three vans through a hire purchase agreement over four years. Two years in, your business receives a large payment from a client, and you consider using it to settle the remaining balance.
You ask the lender for a settlement figure. They tell you that to settle now, you’ll need to pay £22,000. If you wait and make the remaining 24 payments, it would total £26,000. That’s a potential saving of £4,000.
But — there’s an early settlement fee of £500. So, your real saving would be £3,500. You decide it’s worth it, clear the loan, and now fully own the vans — and no longer have monthly payments.
What to Ask Before Settling Early
Before you go ahead with an early settlement, make sure to ask these questions:
- Is there a fee for settling early?
- Do I save any interest by paying early?
- Will I receive confirmation that the agreement is closed?
- Does this affect my ability to borrow again?
And always ask for a written settlement figure. It’s important to know the exact amount and when it expires — usually the figure is only valid for a week or two.
Can It Affect Your Credit Score?
In most cases, settling early does not hurt your credit score. In fact, it can help. It shows that you’re a responsible borrower who pays debts off quickly. But if you’ve had issues with payments in the past, those may still show on your credit file even after you settle.
Also, if you pay everything off and stop using credit entirely, your score may dip a little because you’re not showing ongoing repayment history. So, it’s all about balance.
Final Thoughts
Overall, settling your account benefits you more than the drawbacks it has. Finance companies cannot let you pay for the agreed terms, especially if you now have the financial capability to pay as early as possible.
Before getting yourself into these agreements, make sure you are more than able to pay for the monthly payments rather than hanging just by the thread. It is always better to have cash reserves rather than considering these deals as your final option.
FAQs About Early Settlements
Q: How do I request an early settlement?
A: Ask your lender or broker for a settlement figure.
Q: Are there fees for settling early?
A: Yes. Check your agreement or ask directly, as some include early repayment charges.
Q: Do I actually save money by settling early?
A: Yes, especially on interest, but it depends on the structure of your agreement.
Q: What happens to the asset after early settlement?
A: With hire purchase, you usually take full ownership once settled.
