Repaying a personal loan early

Whether you’ve currently got a personal loan or are looking to take one out, it’s important to understand how easy it is to overpay and what doing so will save you on repayments. But frustratingly, UK lenders are not always as upfront about the costs and savings as they could be. The good news is that they’re all bound by the same rules.

Can I pay off my personal loan early?

Yes. Under the Consumer Credit Regulations 2004, you’re entitled to fully or partially repay your personal loan early in the UK, but lenders can still charge you up to an additional two months interest on any sums paid ahead of time.

So 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 whatever sums you repaid early. Some lenders will classify this additional interest as an ERC, others won’t. It means you may be in for a surprise when you request a final settlement figure and find you haven’t saved quite as much as you might have imagined.

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 still makes financial sense to try and pay off your loan as soon as possible. After all, nobody knows what’s around the corner, so it’s smart to get yourself in a strong financial position while the going’s good!

What if it’s a peer-to-peer loan?

Most peer-to-peer platforms (these are online marketplaces where investors lend money to borrowers) – like Zopa or RateSetter – charge a “loan fee” or “lender fee” as well as interest. Normally a small part of each monthly repayment will go towards this fee, and if you want to pay off your loan early, you’ll need to clear this fee in full.

How much does it cost to repay my loan early?

This can vary from lender to lender and can also depend on the length of time remaining on your loan:

• If you have up to 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.

Additionally, if part of your monthly repayments goes towards the product fee (this is normally the case with peer-to-peer loans), then you’ll need to clear the fee in full when you settle the loan.

If you’re part-way through a loan and want to find out the exact amount, contact your lender and request a “final settlement figure”.

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):

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. You can use our calculator to get a rough idea.

Early pay-off examples

Example #1

• 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 £9,065 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 £9,065 you’ll pay around a further £45 in interest.

If you repay now, then the overall cost of the loan will have been approximately £10,185.

If you leave the loan to run its natural course, then the overall cost of the loan will be approximately £10,755.

Example #2

• Amount borrowed: £10,000
• Loan term: 5 years
• Interest rate: 12%

As with the first 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 £9,245 on your original loan amount, and the 58 days interest on this equates to around £185 in interest.

If you repay now, then the overall cost of the loan will have been approximately £10,765.

If you leave the loan to run its natural course, then the overall cost of the loan will be approximately £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.

1. 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.
2. 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.
3. 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.

1. Notify your lender. You can let your lender know verbally or in writing of your intention.
2. 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.
3. 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.

Moving a balance from a personal loan to a credit card.

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.

Simply put, lenders usually prefer it if you don’t pay off your loan too soon. 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.

Bottom line

Wondering which lenders charge an early repayment fee? The vast majority of banks and personal loan companies in the UK (including HSBC, Santander, Tesco Bank, Halifax and Nationwide) offer unsecured loans with no early repayment fees. However this can seem misleading, in that they are likely to charge up to two months additional interest on sums repaid early.

Loans that are secured against property are much more likely to involve early repayment charges.