Whether you’ve currently got a personal loan or are looking to take one out, it’s important to understand how you can save on repayments. If you’re looking to pay it off early, it can be hard to calculate exactly how much it will cost you.
Whether it’s because you’ve been responsible with your spending and saving, have come into an unexpected inheritance or have even won the lottery, it generally makes financial sense to try and pay off your loan as soon as possible.
But while many lenders advertise that you won’t pay an early repayment charge (ERC) or fee if you pay off your loan sooner than agreed, chances are you’ll still be charged up to two months interest on the amount you still owe.
Can I pay off my personal loan early?
Yes, you’re able to fully or partially repay your personal loan early in the UK. However, there’s still a cost to paying off your loan early, even if your lender claims to charge no early repayment fees. Under the Consumer Credit Regulations 2004, lenders can still charge you up to an additional two months interest if you decide to pay off your loan early.
While some lenders will classify this additional interest as an ERC, others won’t, so you may be in for a shock when you try to repay your loan early and find you owe more than you thought you would.
How much does it cost to repay my loan early?
This depends on whether your lender charges any additional early repayment fees, as well as the length of time left on your loan:
If you have left than 12 months left on your loan, you can be charged up to 28 days interest from the date you inform your lender you want to repay your loan early. This would be in addition to any interest that had been accrued since your last repayment.
If you have more than 12 months left on your loan, you can be charged up to 58 days interest from the date you let them know you want to pay off your loan early. Again, you would also need to pay any interest that has accrued since you last made a payment.
Which lenders charge an early repayment fee?
Many banks and personal loan lenders offer loans that are advertised with no early repayment fees or penalty, while others will explain that paying off your loan early will incur a fee. However, this can be quite misleading, as some lenders appear not to count the additional interest as an early repayment charge, while others don’t.
This means that even if a lender claims to not charge an ERC or other early repayment fee, you’re still likely to have to pay up to 58 days interest on your remaining loan amount. With certain lenders, you may also be charged an additional settlement fee on top of this.
The table below shows some of the lenders that charge an ERC on early loan repayments, and the lenders that claim to charge no ERC.
As mentioned above, even if a lender promises to charge no early repayment fees or ERCs, this probably won’t be the case. It’s still likely that you’ll be charged up to 58 days interest if you try to pay off your loan early, regardless of your lender.
Always check your loan agreement, and contact the lender directly, to see how much it’s going to cost to repay your loan 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):
Don’t worry if you can’t understand it. 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.
Amount borrowed: £10,000 Loan term: 5 years Interest rate: 2.9%
After 6 months, you decide you want to repay the loan in full. Up to this point, you’ve actually repaid around £935 of the original £10,000 (as well as around £140 in interest).
This means you still owe around £9065 on your original loan amount. As you’ve still got more than 12 months left on your loan, your lender charges you an additional 58 days interest. So as well as that outstanding £9065 you’ll pay around a further £45 in interest.
Total cost of the loan: approx. £10,185
Total cost of the loan if not repaid early: approx. £10,755
Amount borrowed: £10,000 Loan term: 5 years Interest rate: 12%
As with the example above, you decide you want to repay your loan after 6 months. So far, you’ve repaid around £755 off your initial loan amount (as well as around £580 in interest). You still have more than 12 months remaining on your loan term, so the lender charges you an additional 58 days of interest.
You still owe £9245 on your original loan amount, and the 58 days interest on this equates to around £185 in interest.
Overall cost of the loan: approx. £10,765
Total cost of the loan if not repaid early: approx. £13,345
As you can see from the examples above, you may save hundreds or even thousands of pounds by repaying your loan early. However, even repaying a 5-year loan after 6 months can still end up being quite expensive.
Because of the way interest repayments work, the amount of interest you pay each month decreases over the course of the loan. This means you’re paying off less of your principal in the early months of the loan, but this amount will still need to be repaid when you decide to pay off your loan early.
As a general rule of thumb, you’ll likely save money in interest by repaying your loan early if you have at least 2 months left on your loan term, but the amount you save overall may be less than you expected.
It’s worth contacting your lender directly and ask for a calculation of how much you’d owe in fees and interests if you were to repay your loan early.
Check your credit agreement
Your credit agreement 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). This should detail how you can repay your loan early, as well as any interest charges or ERCs you may need to pay.
Below is an excerpt from one popular lender’s agreement document:
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.
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.
Table: sorted by representative APR, promoted deals first
Please note: You should always refer to your loan agreement for exact repayment amounts as they may vary from our results.
Late repayments can cause you serious money problems. See our debt help guides.
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.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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