Retail & Consumer Goods

Handle early settlement and withdrawal requests

How to handle consumer requests for early settlement and exercise of the 14-day right of withdrawal from credit agreements. Covers settlement statement obligations, rebate calculations, compensation caps, partial settlements, and the separate withdrawal process under section 66A of the Consumer Credit Act 1974.

UK-wide
Guide summary

You must respond to customer requests to pay off their credit early or cancel their agreement within 14 days. For early repayment, provide a settlement figure within 7 working days. For cancellation within 14 days, process it without penalty. Failing to do this can stop you charging interest or lead to fines.

  • Provide a settlement statement within 7 working days of request
  • Settlement figure is valid for 28 days from the date issued
  • Charge up to 1% compensation if over 12 months remain on loan
  • Charge up to 0.5% compensation if 12 months or less remain
  • No compensation if variable rate or under £8,000 repaid in 12 months
  • Process 14-day cancellations without penalty or reason
  • No interest charged if settlement statement is provided late
  • Treat partial overpayments as early repayment of future instalments
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UK-wide

Related guides in Financial Regulation Overview

Consumers have a statutory right to repay regulated credit agreements early and to withdraw from most agreements within 14 days of signing. These are two distinct rights under the Consumer Credit Act 1974, each with its own process and obligations on the creditor.

Getting this wrong has consequences. If you fail to provide a settlement statement within the statutory deadline, you lose the right to charge interest for that period. If you obstruct withdrawal, you risk FCA enforcement action and claims under the unfair relationships provisions.

This guide explains what your firm must do when a customer asks to settle early or exercises their right of withdrawal.

Early settlement: the statutory framework

Sections 94 to 97 of the Consumer Credit Act 1974 give consumers the right to repay all or part of a regulated credit agreement at any time. You cannot contractually exclude or restrict this right.

When a customer contacts you about early settlement, your obligations begin immediately.

Handling a settlement request step by step

  1. 1

    1. Acknowledge the request promptly

    When a customer asks to settle early (orally or in writing), treat it as a formal request under section 97. Log the date and time of the request as this starts the 7-working-day clock for providing a settlement statement.

  2. 2

    2. Calculate and issue the settlement statement

    Calculate the settlement figure using the Consumer Credit (Early Settlement) Regulations 2004. The statement must show the total amount required to discharge the debt in full, including any compensation you intend to charge. Issue the statement within 7 working days of receiving the request.

  3. 3

    3. Apply the correct compensation cap

    If the remaining term exceeds 12 months, you may charge up to 1% of the amount repaid early. If the remaining term is 12 months or fewer, the cap is 0.5%. No compensation is payable if the interest rate is variable or if the early repayment does not exceed GBP 8,000 in any 12-month period.

  4. 4

    4. Process the settlement payment

    When you receive the settlement amount, apply it to close the account. The settlement figure is valid for 28 days from the date of the statement. If the customer pays after 28 days, you may need to recalculate.

  5. 5

    5. Confirm the account is settled

    Notify the customer in writing that the agreement is fully discharged. Update any relevant credit reference agency records to show the account as settled.

Partial early settlement

Under section 94(3), customers can also make partial early repayments at any time. You must treat any overpayment beyond the current minimum required as an early repayment of future instalments. Recalculate the remaining balance and either reduce the term or the instalment amount accordingly.

Common settlement scenarios

Customer switching lender: The new lender may request the settlement figure directly. Verify that the customer has authorised this disclosure before providing figures to a third party.

Customer remortgaging: Where the consumer is consolidating debts into a mortgage, the settlement process is the same. The conveyancer or new lender may coordinate timing of the settlement payment.

Customer clearing debt from savings: Apply standard settlement procedures. The customer is not required to explain their reason for settling early.

The 14-day right of withdrawal

The right of withdrawal under section 66A is entirely separate from early settlement. It allows consumers to walk away from most regulated credit agreements within 14 days, without giving any reason.

How withdrawal works in practice

Customer notification: The customer can give notice orally or in writing. There is no prescribed form. If the customer says "I want to cancel" or similar words indicating an intention to withdraw, treat this as a valid notice.

Repayment: Within 30 days of giving notice, the customer must repay the credit drawn down plus any daily interest that has accrued. You must not impose any other charges for the withdrawal.

Ancillary contracts: Any linked service contract (such as payment protection insurance) is automatically terminated when the customer withdraws from the credit agreement.

Key distinction from early settlement: Withdrawal treats the agreement as if it had never been entered into. Early settlement ends an existing agreement that ran its course. The practical difference is that withdrawal carries no compensation charge, whereas early settlement may incur up to 1% compensation.

What to watch for

Late settlement statements: If you fail to provide the statement within 7 working days, you lose the right to charge interest from the date of the request until the statement is provided. This is a self-executing penalty under the Act.

Obstructing settlement: The FCA views any attempt to discourage or delay early settlement as a serious conduct issue. Do not make settlement conditional on speaking to a "retention team" or impose administrative hurdles.

Rebate disputes: If a customer disputes the settlement figure, review the calculation under the Early Settlement Regulations 2004. The actuarial method prescribed by the regulations must be applied correctly.

Official sources

Legislation and FCA guidance on early settlement and withdrawal rights.