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What happens if you pay off a personal loan early?

Paying off a loan early could save you money on future repayments, but half of all personal loans have early repayment charges (ERCs) attached. Whether you have a personal loan, or are looking to take one out, it can be hard to calculate how much paying off a loan early could save or cost you.

You need to watch out for ERCs that you may have agreed to when you took the loan out. Even if your lender does not claim to have an ERC, you still need to watch out for hidden fees. Under Consumer Credit Regulations 2004 lenders can charge you up to 2 months additional interest if you decide to pay your loan off early. Many lenders will be open with you and call this an ERC, but others won’t, so before you pay off your loan early it’s good to check with your lender what the extra fees might be.

The cost of your early repayment charge will depend upon a number of factors and will differ from lender to lender. The Consumer Credit Regulations 2004 previously mentioned state the following.

  • If you have less than 12 months left on your monthly repayment plan, lenders can charge up to 28 days’ interest.

  • If you have more than 12 months left on your repayment plan, lenders can add an extra 30 days (or one calendar month).

You will therefore be charged 1-2 months’ interest, depending on the length of the policy you have taken out. Other fees may apply if your loan is for more than £8,000, including:

  • 1% of the amount repaid early if the agreement has more than a year left.

  • 0.5% of the amount repaid early if the agreement has less than a year left.

  • The remaining interest before the rebate.

How much could I save with early repayment?

The amount you can save from paying back your loan early will depend upon the size of your original loan, the interest rate on the loan, and the length of time left on the loan term.

For example, if you have few repayments left to make and a low interest rate then you probably won’t save too much. However, if you take out a large loan with high interest rates and decide to pay it back with a few years left on the final repayment date, then you may save thousands.

It is always worth contacting your lender directly and asking for a calculation of how much you’d owe in total with normal monthly repayments vs. how much you’d have to pay if you paid off the loan early. You can then compare the two and see how much you would save.

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