When you take out a loan, you agree to pay a fixed amount every month for a set time – say five years. These payments include interest at the agreed rate, plus a percentage of the original amount borrowed.
If you can pay the loan off early, for example because you’ve had a windfall, you’ve saved enough to clear the balance, or you want to consolidate the loan with other debts such as an overdraft, you will pay less interest overall.
However, you’ll generally have to pay early repayment charges, so check first that these won’t wipe out your savings.
Yes, you can pay off a loan early if you want. Doing so will save you paying interest for the full term, but will usually mean being charged a fee. 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:
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 repay your loan early 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.
The charges you face for early loan repayment will depend on your loan agreement. For personal loans, they are usually equivalent to one or two months’ interest.
Example: On a three-year £10,000 loan at an interest rate of 8%, the monthly interest averages out at about £34 a month. If the lender imposes a two-month early repayment fee, you would therefore be charged around £70.
As you pay interest on a larger amount at the start (before your repayments have started eating into the amount you owe), the charges for repaying the loan early will be higher as a result. You may also face other charges, such as up to 1% of the amount being repaid – or £30 on a £3,000 repayment.
On mortgages, early repayment charges are often calculated as a percentage of the balance of your account. They tend to be charged on a sliding scale depending how long you have left to run on your mortgage deal.
Example: If you have a five-year fixed-rate deal, you might have to pay 5% of the mortgage amount to clear your mortgage in the first year. If your balance is £200,000, you’ll therefore have to pay £10,000. By the fifth year, the fee could have fallen to 1%, while the amount owed has come down to £170,000, so you would only have to pay £1,700 to pay off your debt.
Early repayment charges (ERCs) are penalty fees you are charged when you pay off a loan before the end of the term agreed at the outset. Charged on the majority of both personal loans and mortgages, the level of these fees depends on the loan agreement you have with your lender. You can check popular loan providers’ early repayment fees using the table below.
|TSB||If there is less than 90 days left of the original term there is no fee, but if there is more than 90 days left you'll be charged up to 58 days interest|
|AA||58 days interest - effectively once you give notice, they will base the settlement on what you owe 58 days after that|
|Cahoot||30 days interest|
|Tesco Bank||Up to two months interest|
|Santander||30 days interest|
|Sainsbury's||Up to 58 days interest|
|Virgin Money||Up to 58 days interest|
|Post Office||Up to 58 days interest|
You can often overpay by up to a certain amount – say 10% a year – on your monthly mortgage payments without incurring charges. By doing this, you can save money on interest costs, and enjoy the freedom of owning your home outright sooner. Our handy Mortgage Overpayment Savings Calculator will show you just how much you can save.
However, with most mortgage deals, you’ll face hefty early repayment charges if you want to overpay by more than the allowed percentage. So you have to work out whether the amount you can save by repaying your home loan early outweighs these costs, which often run into thousands of pounds. If you have a mortgage deal that imposes fees for say 3 years, it may make sense to wait until this ends to pay a fee-free lump sum off your mortgage.
Whether or not paying off a loan early is a good idea will depend how much interest you have left to pay, as well as the early repayment fees you will 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 12 months of interest left to pay, you should be able to save overall by repaying the loan now.
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 should help you make the right decision.
It’s easy to check how much you could save by using a lower-rate loan to repay your existing loan early. Just enter a fee 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 with MoneySuperMarket.