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Can I pay off my loan early?

Paying off a loan early is usually possible, but there may be penalties and conditions attached. Find out where you stand.

Paying off a loan early is usually possible, but there may be penalties and conditions attached. Find out where you stand.

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
9 FEBRUARY 2023
4 min read
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What do I need to know about repaying a loan early?

Paying off your loan before the end of your credit agreement is called early repayment or resettlement. Whether you can repay all or part of your loan early will depend on the agreement with your lender.

The credit agreement you signed or were sent at the time you took out the loan will have a section on early repayment conditions, which will detail any fees and charges.

If you pay off your loan early, it means the lender will receive less money in interest. Early repayment charges are there to cover some of the interest you would’ve paid in months to come, if you continued with the full length of the agreement.

Can I repay my loan debt early?

Loan providers must allow you to pay back a personal loan early in full, but they can charge you an early repayment charge (ERC). Early repayment charges vary, but typically you can expect to pay the equivalent of one to two months’ interest.

Any fees and how they’re calculated should be set out in your loan information and agreement, so you know what to expect if you repay early.

Under the Consumer Credit Directive, if you took out a loan after February 2011, you can typically make full or partial settlement payments of up to £8,000 a year without facing penalty fees.

If you want to repay more than £8,000, the maximum amount you can be charged depends on how long is left on your credit agreement:

  • If you have more than one year remaining on your loan, the lender can charge you up to a maximum of 1% of the amount repaid early.
  • If you have less than one year left on your loan, the lender can charge you up to a maximum of 0.5% of the amount repaid early.

These rules also apply to partial overpayments (when you pay back some of your loan early, but not all). You might not be able to make partial overpayments on unsecured personal loans taken out before 1 February 2011 and many secured homeowner loans.

Check the credit agreement you have with the lender for full conditions of any early repayment fees or overpayment penalties, as these can vary. When choosing a loan, it can be worth looking for one without early repayment charges if you think you might be able to repay it before the term ends.

How do I pay off a loan early?

First, contact your lender and ask them for an early settlement amount. Your lender should provide you with a settlement statement within seven days of receiving your request. They should tell you:

  • How much of the loan you’ve already paid off
  • How much you still owe on the loan
  • Any early repayment charges or penalty fees that apply.

Once you’ve received your early settlement offer, you’ll have 28 days to decide whether to make the early repayment. If you decide to wait, you can continue your repayments as normal and ask your lender to recalculate your early settlement amount in the future. 

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

It depends on your personal circumstances and the terms of your loan agreement. If you have some extra money coming in, using it to clear or reduce your debts seems like the responsible thing to do. But in some cases, it may not be your best option.

To decide if it’s a good idea for you, weigh up the costs and benefits:

Benefits:

  • You’ll pay less in interest. If you decide to pay off some or all your loan early, you won’t have to pay the full amount of interest detailed in the original credit agreement. Under the Consumer Credit Act, the total amount of interest payable is reduced by a statutory rebate, which will be calculated by your lender.
  • You’ll be debt free sooner, leaving you with extra money each month to save or pay off other debts. If you have multiple debts, work out which is the most expensive debt and pay that off first.

Costs:

  • Early repayment fees and charges. You’ll need to weigh up how much you’ll pay in early settlement fees against the amount you’ll save in interest to see if paying off your loan early is a good call for you.
  • Interest charges. Even if a lender advertises a loan with no early repayment charges, you could still be charged up to two months’ interest on the amount you’re repaying. Read the terms of any credit agreement carefully before you sign up.

Don’t forget, depending on your circumstances, you may be better off switching your loan (paying off your current loan with a new one) or combining multiple loans into one debt consolidation loan. It’s worth comparing other loans to work out what’s most suitable for you.

Comparethemarket Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

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Where can I compare loans?

You can compare loans with us. Just tell us much you want to borrow to find a personal, homeowner or debt consolidation loan. And if you use our eligibility checker, we’ll tell you which loans you’re likely to be accepted for. It’s a soft check, so won’t impact your credit score.

Frequently asked questions

How much could I save by paying my loan early?

The amount you could save depends on the size of your loan, how much interest you’re paying and how much time left you have on the loan.

You can ask your lender to provide you with an early settlement statement that clearly sets out how much you’d save by repaying early and how much you’d have to pay in early repayment charges.

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

When you compare loans through us, you’ll be able to see the key features of each deal, including whether any early repayment charges apply.

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

When you take out a loan, you have a 14-day ‘cooling off’ period in which you can cancel the agreement. This is your right, under the Consumer Credit Act, and typically covers:

  • Personal loans
  • Credit cards
  • Payday loans
  • Store cards and store finance.

If the money’s already been transferred into your account, you’ll need to pay it back in full within 30 days. Try to repay as soon as possible, as the lender is legally allowed to charge you interest until they get back the full amount.

If I think the early repayment charge is unfair, can I complain?

If you think you’re being overcharged or your lender is treating you unfairly, you have the right to complain. First off, you should make a complaint directly with your lender. If you’re not satisfied with the results, you can take your case to the Financial Ombudsman Service (FOS). The FOS offers a free and impartial service, and has the power to resolve disputes between financial organisations and their customers.

Can I repay my car loan early?

It depends on the car finance agreement you have. The terms of the agreement should say whether early repayment or overpayment is allowed and show any applicable fees. Contact your car finance provider to ask for an early settlement amount.

Can I pay off my mortgage early?

You may be able to make overpayments on your mortgage, depending on your mortgage terms. Overpaying on your mortgage can help you pay off your mortgage earlier, although you may have to pay an early repayment charge if you pay off your mortgage before the end of its lifetime.

Overpayments could come in the form of a one-off lump sum or by paying more each month than is required, but there are often caps in place on the amount you can overpay per year.

Will paying off a loan early affect my credit score?

Paying off a loan early could affect your credit score in the short term. If you’re paying off a loan consistently, it shows to lenders that you can manage debt responsibly. If you pay off the loan in full, the account is then closed so the lender won’t have this evidence.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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