Unless you reach an agreement like Crazy mentions, any settlement for less than the amount owned will impact your credit score in a negative way. What the actual numerical value will be we can't really know, but it hurts just as much as not paying off the loan at all. FICO doesn't really seem to make a distinction between the different variations of people not paying something off as agreed - even if its by a settlement.

Don't do it unless you get it in writing that they will either report it as paid in full or erases the account completely.
In my experiences working with others, it starts off as an agreement to show paid in full but after the deal is done it will showed paid in settlement. Then you have to contact the finance company and either get them to show it as "paid in full" as per the agreement or have them delete the account entirely.
Oddly enough, its easier for some creditors to delete an account entirely than it is to just report it as paid.
Kubota credit and Ford are that way.

If you have had any late payments on the account? Then it may do your credit better just to have the account wiped out.

I am weighing my options on whether to "settle" my current car loan for $ 3500 less than I owe. The car is currently worth half of the loan. I am trying to cut my losses due to a bad divorce and do not know how much my credit score would be reduced if the car loan reported "Paid by Settlment" instead of "paid off as agreed. Is this hit worth $ 3,500?

Are you behind on the car loan? I would call the lender and tell them that if they want to see another dime, they need to come play ball on your baseball field. ANY settlement should preclude credit reporting as in all of it.

A settlement may not leave you off the hook for the unpaid balances. check the terms and your state laws.
That would of course depend on the language in the settlement agreement.