Paying Off A Loan Early
Paying off a loan early could save you money on future repayments, but half of all personal loans have early repayment charges 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. Read this useful guide to find out how to pay off your loan early, without running into problems with early repayment charges.
In This Guide:
- Can I pay off my loan early?
- How much is an early repayment fee?
- How do I know which lenders charge a fee?
- How much could I save with early repayment?
- How do I pay my loan early?
- Can I cancel my loan?
Can I pay off my loan early?
In short – yes – you can always pay back your personal loans early. However, you need to watch out for early repayment charges (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.
How much is an early repayment fee?
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 one or two month’s interest, depending on the length of the policy you have taken out. Other fees may apply if your loan is for more than £8000, they could be:
- 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.
If you are worried about how much it will cost to pay back your loan early, then it’s best to check with your lender before you begin the repayment process.
How do I know which lenders charge a fee?
As mentioned above, there is some confusion with many lenders regarding their ERC policy. This is due to some lenders counting the ability to charge for additional interest as an ERC and therefore not advertising that they will charge you when you pay off a loan early.
Checking your credit agreement is the best way to find out whether you will have to pay a fee for paying off your loan early, either before or after you have taken out a loan. The agreement sets out the terms for the borrower and lender to abide by. It should detail what happens if you decide to pay off your loan early.
The below tables lay out lenders that charge an ERC and those that claim they don’t charge an ERC.
Lenders that charge ERC:
- 118 188 Money
- 1st Stop Personal Loans Ltd
- Bank of Ireland UK
- Bank of Scotland
- Barclays Bank
- Clydesdale Bank
- Creation Financial Services
- Everyday Loans
- first direct
- Ikano Bank
- Likely Loans
- Lloyds Bank
- M&S Bank
- Madiston LendLoanInvest
- Royal Bank of Scotland
- Sainsbury’s Bank
- Tesco Bank
- UK Credit Limited
- Ulster Bank
- Yorkshire Bank
Lenders that claim not to charge ERC:
- Danske Bank
- First Trust Bank
- John Lewis Financial Services
- Lending Works
- Metro Bank
- Post Office Money
- Starling Bank
The above tables may not be up to date – please check with your lender about their current ERC policy before applying for a loan or making an early repayment.
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.
How do I pay my loan early?
Paying your loan back early is easy and can be completed in three simple steps outlines below:
- Contact your lender – get in touch with your lender and request an ‘early settlement amount’ for your loan.
- Your lender will then give you a figure to pay and 28 days to pay it. You don’t have to complete payment if you don’t want to, you would just have to request the amount again if you missed the 28-day payment window.
- Make the payment!
If you only wish to make early repayment for part of your loan this is known as overpayment. Overpayments allow you to make your monthly repayments cheaper by lowering the amount of interest you’ll have to pay on the amount you owe. If you wish to make an overpayment, then you should follow these steps:
- Notify your lender that you will be overpaying.
- Make your overpayment within 28 days.
- Your payment schedule for the rest of the loan will be adjusted by your lender.
Note that partial overpayments are sometimes not allowed or will incur fees. When you notify your lender that you wish to make an overpayment, check that you will not be charged extra for doing so.
Can I cancel my loan?
When you take out a loan you have a 14 day ‘cooling off’ period in which to cancel your agreement. Of course, you will have to repay all the money you have been loaned within 30 days, and the lender is legally allowed to charge you interest until they receive the loan back.