Repaying a personal loan early – know where you stand
Won the lottery? Great Aunt Mildred left you her fortune? Or maybe you've just been prudent with your income and outgoings lately. Whatever your reason for wanting to make overpayments or clear your personal loan early, you can take control of the situation by knowing where you stand.
Nobody really likes being in debt. But us Brits are becoming more and more used to living with ever-higher levels of it, thanks to factors like eye-watering housing costs and the unavoidable student loan. Aiming to become as debt-free as possible is the “end-game” for most of us, and it’s a commendable attitude which is really just part of being responsible with money.
So if you’re able to pay off some or all of your personal loan ahead of time, then as well as peace of mind, you should enjoy savings on the interest, right? Well, yes, but unfortunately it’s not always the saving you might have been expecting.
How much will I save by repaying early?
Thanks to the Consumer Credit Act, borrowers who repay early are entitled to a rebate equivalent to the difference between the total remaining projected cost of the loan and the amount given by the following formula (explanations of the various elements of this formula can be found at the link above):
Great, so… everybody got that? Good.
If, however, like me, you’re filled at this point by feelings of woeful inadequacy and regret that you didn’t pay closer attention in Mr Collins’ maths class, even though he told you repeatedly that “you’ll need this one day”, then don’t panic. The long and short of it is that the amount you’ll save by repaying early is likely to vary from lender to lender, but they’re all subject to the restrictions of the above formula.
Now it’s time to take a closer look at your credit agreement – the document that sets out the terms which both the lender and the borrower must stick to. It’s this document that’s covered by the Consumer Credit Act (bear in mind that certain types of loan are exempt from this, such as loans from an employer, mortgages and credit union loans). Below is an excerpt from one popular lender’s agreement document. This is the section you’re looking for.
The early repayment policy above is quite typical – any sums paid early may incur up to about 2 month’s interest beyond the date on which the lender received notice from you. Some lenders, especially many of the “payday” lenders, will only charge you for the days on which you borrowed the money.
Want to quickly see which lenders can offer you a loan?
Late repayments can cause you serious money problems. See our debt help guides.
How do I pay off my loan early?
Here are the steps you’ll need to follow if you want to settle your loan ahead of time.
- Contact your lender. Request an “early settlement amount” for the loan. If your lender is especially awkward, they could make you do this in writing, but more often than not you can set the wheels in motion through your internet banking (as per the example above) or over the phone.
- Your lender must give you a figure and 28 days to pay it. You are under no obligations at this point, and can simply continue with the loan as previously agreed should you wish.
- Make the payment. Congratulations – you’ve cleared your loan!
How do I make an overpayment on my loan?
If you’re aiming to make overpayments here and there when you’ve managed to save a little extra or spend a little less that month, or if you’ve come into some money and want to pay a chunk off your debt, here’s what you should do.
- Notify your lender. You can let your lender know verbally or in writing of your intention.
- Make your overpayment within 28 days. You are under no obligations at this point, and can simply continue with the loan as previously agreed should you wish.
- Your payment schedule for the rest of the loan will be adjusted accordingly. Lenders can either keep your remaining instalment amounts the same, and your loan will simply end earlier; or reduce your instalment amounts so that the loan still ends at the same point. Your lender should clarify in the loan agreement which of these they will do by default, and you may allowed to specify which of the two you’d rather.
Can I just cancel my loan?
Potentially, yes. After signing the loan agreement you’ll have 14 days in which to cancel – this is your “cooling off” period. What’s more, you don’t even have to give a reason. Naturally, the lender will want you to return the all money straightaway – legally you have 30 days in which to do so. Just remember that even if you cancel the loan, the lender IS allowed to charge you interest until it receives the funds back from you.
If you’re planning to transfer your personal loan to a credit card, we have a guide for that!
Moving a balance from a personal loan to a credit card.
Comparing personal loans
Perhaps you haven’t yet taken out a personal loan, and you’re simply at the stage of shopping around. If you’re hoping to be able to make overpayments on the loan here and there, or if you have a lump sum of cash coming your way sometime soon, you should factor early repayment terms into your comparison. Favourable early settlement terms could well be more useful to you than a slightly lower rate. Remember, if a lenders states “there are no charges for repaying your loan early” that’s not the same as saying that repaying your loan early will save you money. As well as looking for favourable terms, look at how easy it actually is to overpay.
The bottom line is that lenders don’t want you to repay your loan early. Sure, they get their money back safely ahead of time, but they’ve made less money than they expected to. That’s why they don’t always make it as easy as they should to overpay/repay early, and that’s why they may want to charge interest beyond the date of repayment.
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