Early loan repayments

Key takeaways

• You can make early loan repayments to save on interest, but be aware of potential penalty charges

• ERCs are penalty fees for paying off a loan before the agreed term ends, these apply to personal loans and mortgages

• Paying off a loan early reduces lenders' expected profit

• Paying off a loan early doesn’t always boost your credit score

Can I pay off a loan early?

You should be able to make early loan repayments to save you from paying interest for the full term, but you may incur a penalty charge.  

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.

Can I save money by paying off my loan early?

Whether making early loan repayments will save you money depends on if the early repayment charges you could incur outweigh how much you’ll reduce the amount of total interest you’ll pay.   

Under Consumer Credit Regulations 2004, lenders can charge you up to two months of 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.

How else can I save money on a loan?  

Paying off the loan early with money from your savings or current account is not the only way to save money on interest payments. You could also:    

Refinance

This involves taking out a new loan agreement from a lender with better financial terms and using it to pay off the existing outstanding loan.

You are still likely to face an early repayment charge, but if the new personal loan has a lower interest rate, you may be able to save money overall.

This might be an option if interest rates have fallen since you took out the original loan amount.   

Reduce the loan term

Reducing the loan term will increase the amount you pay each month, but you’ll reduce the number of payments to pay less interest overall.

Whether this is an option will depend on the terms of your loan, as lenders may be unwilling to change the initial agreement.

While you are likely to face an early repayment charge, you can factor this cost in to decide whether it’s worth it.

Make sure you’re still able to afford the interest payments month-on-month if you reduce the length of your loan.

If not, any fees and charges for missed payments will quickly erode any savings you make from paying less total interest. 

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 when paying 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.  

Why do providers charge early repayment fees?   

When loan providers approve applications, they do so in the knowledge they are taking on a certain amount of risk that the loan may not be repaid, but should stand to make a profit through the interest repayments,   

Because the interest rate and length of the loan is set from the outset, lenders know exactly how much return a single loan should generate. However, if you decide to pay back the loan early  – and save yourself additional interest  – this cuts into their profit margin.   

By charging early repayment fees it means that even if you pay back the loan early some of their projected turnover is protected even if they don’t get the full amount of interest they originally banked on.   

Because they are authorised by the Financial Conduct Authority, lenders also have to treat customers fairly, and shouldn’t encourage them to take on more debt than they feel they need.    

This means they cannot make early repayment charges so prohibitive that there is no benefit for a customer who is in position to pay a loan off early from taking that option.    

Early repayment charges don’t only apply to personal loans. They are also included on other financial products such as secured loans and mortgages, as our guide explains. 

How can I find out which lenders charge an early repayment fee?   

Most lenders will charge an early repayment fee should you wish to pay off a loan early, but the important factor is how much the charge will be.   

While there is no set fee for early repayment charges, it is often around one or two months interest for the loan.

The exact early settlement amount will depend on how much you have left to clear on the loan when you decide to pay it off.   

Early repayment charges should always be listed in the terms and conditions of the deal, so check before you apply to make sure you are happy to proceed.

When you search through MoneySuperMarket, we’ll show you all the key features of each deal, including whether any early settlement charges may apply.   

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.

Can I pay off more of my personal loan per month if I want to save money?

You may be able to pay off more of your loan per month to save money, but it will depend on the loan provider and structure of the deal. 

For example, you may be able to make an overpayment up to a certain amount, but if you go beyond that it will trigger an early repayment charge. Check the terms and conditions and contact the lender if you are unsure. 

You may be able to transfer the extra amount through your mobile banking app or even set up a higher direct debit from your current account, but first check that the loan provider can receive the extra payment this way.   

Overpayments are often useful because they will chip away at the capital of the loan which should mean you pay less interest in total and can clear your debt more quickly.

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.

Can I cancel a loan once I’ve borrowed the money? 

You have a legal right to cancel a loan within a specific timeframe known as the ‘cooling-off period’ in the UK. This period is typically 14 days from the day you receive the loan agreement or a notice informing you that you've been approved for the loan, whichever is later. This right to cancel is granted under the Consumer Credit Act. 

To cancel the loan within the cooling-off period, you must notify the lender in writing. You'll need to repay the amount borrowed and any interest accrued up to that point, and any fees incurred. The lender may also charge a daily interest rate for the time you had the loan. 

It's essential to read the loan agreement carefully and understand the terms, including the interest rate and any associated fees before you apply.  

Compare loans with MoneySuperMarket

Looking for a loan with a lower interest 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 – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.