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Early loan repayments

Is it a good idea to pay off a loan early?

published: 24 November 2022
Read time: 5 minutes

While you can choose to pay off a loan early, you’re likely to face an early repayment charge (ERC) for doing so. Here’s our guide to early loan repayments and what you’ll need to consider...

Can I pay off a loan early?

You should be able to make early loan repayments if you want to – doing so will save you from paying interest for the full term –but there may be penalty fees to do so. 

To find out exactly how much you will need to pay to repay your loan in full, you’ll have to ask your lender for an early settlement amount. This will show you:

  • How much you’ve paid so far 

  • How much you still owe

  • What interest charges you’ll have to pay

  • Any early repayment charges that apply

Once you’ve received your early settlement amount, you’ll have 28 days to decide whether or not to go ahead. If you decide to make early loan repayments after that point, you’ll have to ask for the early settlement amount to be recalculated. 

Whether or not you can make partial overpayments will depend on the type of loan you have, when you took it out, and the agreement you signed with the lender.

Want a better idea of how much your loan will cost you? Check out our loans calculator.

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Can I save money by paying off my loan early?

Whether making early loan repayments will save you money or not will depend on your financial situation and how much you’re currently paying in interest. While paying off a loan early could save you money on future repayments, you could face early repayment charges (ERCs). Under Consumer Credit Regulations 2004, lenders can charge you up to twomonths additional interest if you decide to pay your loan off earlier than planned. If your loan has less than 12 months to run, lenders can only charge up to one month’s interest for early redemption.

Example: On a three-year £10,000 loan at an interest rate of 8%, the monthly interest charge is about £34. If the lender imposes a two-month interest early repayment fee, you would therefore be charged around £70. But if you repaid the loan after one year, you’d make a saving in interest of more than £800 over the remaining two-year term (based on a three-year loan at 8%) – so you would still be better off.

Are there costs to repay a loan early?

While paying your loan back before the end of the term may sound like a way to save money, you’ll need to keep an eye out for any costs, such as early repayment charges (ERCs.) To check if any early repayment charges apply, take a look at the documents you were given when you took out your loan – they should explain if there’s any redemption fee or early repayment charges and how much they might cost you. 

With some unsecured loans, you can make overpayments up to £8,000 within 12 months without being charged for it – but this will vary depending on the type of loan you have and your lender’s terms, so check this beforehand.

What are early repayment charges?

Early repayment charges (ERCs) are penalty fees you are charged whenpaying off a loan before the end of the term agreed at the outset. They’re charged on the majority of both personal loans and mortgages. The level of these fees depends on your loan agreement with your lender. Looking for more information on early loan repayment charges for mortgages? Take a look at our guide

Can I repay my car loan early?

Whether you can pay off your car loan early will depend on your lender and the type of car finance you have. For most types of car finance, you’ll need to contact your provider and ask for a settlement figure and some loan providers will charge you extra fees if you start making higher repayments than you’ve agreed to. In other cases, finance providers may have no problem with you doing so. There may be an early repayment charge if you want to pay off the loan in full before the end of the term.

Does paying off a loan early affect my credit score?

If you have spare cash and you’re looking to pay off your loan early, you might assume this would boost your credit score. That’s because it feels logical – if you’re in less debt, you’ll have a better credit score, right? In reality, this isn’t always the case.

Unlike credit cards, where if you make a credit card payment your credit score should improve (because you’re reducing your debt relative to your available line of credit), making early loan repayments can work differently for your credit score. When you pay off a loan, your credit report shows the account as closed, and open accounts tend to have a greater positive impact on your credit score as they’re seen as a measure of how well you’re managing your debt. By paying off your loan early, you’ll be closing the loan account and reducing the diversity of your available credit. Sometimes lenders like to see that you’re clearing your debt over time in monthly repayments as it shows you’re managing your money well.

It could still be worthwhile using extra cash to repay your loan early and any negative impact on your credit file is likely to be small and temporary. But it might be something to bear in mind if you’re just about to remortgage, for example. 

Are early loan repayments a good idea?

Whether or not paying off a loan early is a good idea will depend on your personal situation and how much interest you have left to pay, as well as the early repayment fees you may face to clear the debt before the end of the term. If, for example, the fee for paying your loan off early is two months' worth of interest, but you have just over a year of interest left to pay, it may not be worthwhile repaying early. In contrast, if you still have many more years of interest ahead, the savings are likely to be greater by redeeming early.

If you’re paying a very high interest rate on your existing loan, it may also be worth taking out a debt consolidation loan to pay it off – even if you have to pay an early repayment charge to do so. Using our Loan Calculator to work out how much you could borrow and how much it will cost you each month can help you make the right decision.

Compare loans with MoneySuperMarket

Looking for a loan with a lowerinterest rate to help you save? Comparing loans with MoneySuperMarket is an easy process – just enter a few details, including the amount you need to borrow, and you can compare loans you’re likely to be approved for from more than 40 different providers. Just make sure you factor in any early repayment charges on your existing loan and work out if you’d be saving money overall by switching deals.

MoneySuperMarket is a credit broker not a lender. You must be 18 or over and a UK resident.

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