How to repay a personal loan early
Paying off a loan early can be a huge weight lifted from your shoulders, but there may be penalty fees and interest charges to pay.
If you are repaying a personal loan, you will have a set timeframe for doing so - which is calculated when the loan is first approved.
Repayment charges and interest are set out in the loan agreement and it will also have details about how you can settle the debt early if you choose.
But if you’ve come into some cash and are ready to settle your loan early you may also be hit with extra fees or interest charges. Here we explain exactly what can happen when paying off a loan early.
How can I pay off a loan early?
If you want to pay off a personal loan early, you can but there may be some extra charges to pay. It may well still make financial sense, but it’s important to be aware of the costs first.
How you pay it back, and how much this might cost you, will depend upon the conditions of the loan, which will be set out in the agreement signed when you took it out.
You will usually need to tell your lender that you want to pay the loan off and it will provide you with an ‘early settlement amount’ which is a figure for the remaining amount of money, plus any extra charges, it needs to clear the loan. If you agree to this amount, most lenders request that you repay it within 28 days. But if you change your mind you can continue with your regular payments.
Why should I pay a loan off early?
Most people decide to pay off a loan if they have the money to do so - they’ve come into some money from an inheritance, been given a bonus at work, had a pay rise or they have enough in their savings.
It’s a personal decision whether you use this money to pay off a personal loan and it’s well worth checking all the terms and conditions of the loan before you do so.
What are early repayment charges?
Usually you will be charged interest of between one and two months and the earlier in the term you repay the loan, the greater the charge is likely to be.
You may also be charged a penalty if you increase your payments towards your loan over a certain amount, in order to clear it sooner.
If you took out an unsecured loan after 1 February 2011 under the Consumer Credit Directive, most people can make extra payments of up to £8,000 in a year without any penalties. For payments over £8,000 you can be charged up to 1% of the early repayment amount. If it’s the last year of paying back the loan, the maximum penalty a provider can charge is 0.5% of the early repayment amount. For full details of your loan terms, check with your loan provider.
Why do providers charge early repayment fees?
Providers are allowed to charge these fees because when you take out the loan they calculate the amount of time it’ll take you to pay back, and the interest it will charge you for doing so. By ending the agreement early, the provider ends up with less money in its pocket so it can reclaim a little of this through early repayment charges.
It’s important you tell your provider if you are changing the amount you pay, as you generally can’t just start making larger payments to it without a penalty being charged.
Do I have to pay an early repayment fee?
You generally can’t get away with not paying these fees. If you decide to end the agreement early you will be charged the extra - although there may be other options for making the loan cheaper if you don’t want to pay the fee.
How else can I save money on a loan?
It may be possible to lower the costs of your personal loan through refinancing or reducing the term of the loan.
Refinancing to a lower interest rate
Although your aim is clearing your debt and paying off your loan early, if you’re not able to do this, refinancing to a cheaper loan might be an option. If you can find a personal loan with a lower interest rate, this could work out as a cheaper option for you if you don’t have the cash to clear your existing loan. Remember, early loan repayment charges may still apply to the original loan so factor those into your calculations.
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Reducing the length of the loan
It may be possible to reduce the length of time you’re paying back your loan, which should also mean you pay less interest overall. Speak to your lender and see what your options are, it may agree to shortening the loan but watch out for changes to your interest rate if it does.
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Can I complain about an early repayment charge?
From personal loans to mortgages, lots of different loans have early repayment charges applied if you clear the debt early. However, these charges need to be ‘fair’. If you think you’re being charged an unfair amount, you have the option to refuse to pay it and to continue with your loan agreement, or to complain about the charge, first to your provider and then to the free Financial Ombudsman Service.
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Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more