A simples guide

Can I repay loan debt early?

It always feels good to tick things off your ‘to do’ list. It’s even better when one of those things could save you money – like paying off a loan early. But before you start signing cheques away and celebrating, check if you can actually do it, and if you can, are there any penalties?


Repaying a loan

When you take out a loan, you’ll have agreed a time period over which to pay it back by – which probably influenced the minimum payments you make each month. Whether you can repay all or part of your loan early, will depend on your agreement with the lender.

loan papers

So, can I repay my loan debt early?

Your loan contract should clearly state what your options are when it comes to paying back your loan. But sometimes it can be difficult to make sense of what is actually being said. Terms such as ‘early repayment charges’, ‘early payment penalties’ and ‘financial penalties’ all refer to fees that may be charged if you decide to pay back your loan early.

If you took out your loan between June 2005 and 1 February 2011 then you can be charged up to two months’ interest. But be aware that the earlier you try and repay your loan, the more interest you’ll be charged.

Depending on the type of loan you have, if your loan was agreed after 1 February 2011 then the changes made as a result of the ‘Consumer credit directive’ will work in your favour. The directive says that you can make early payments (known as a partial early settlement) or pay off all of your loan early (a full early settlement) without being charged for it – as long as you don’t pay off any more than £8,000 over a 12 month period.

If you have paid off more than the £8,000 and there’s more than a year to go on your repayment, then you can be charged up to 1% of the amount being repaid early. If you’re in the last year of your loan payments, then that figure is reduced to 0.5%. The level of charges also cannot be more than the remaining interest before the rebate.

Of course – like all rules, there are some exceptions and even if you want to make an early repayment of less than £8,000 then you could still face some early repayment fees depending on the type of loan you have.

Make sure you read your credit agreement in full to understand what fees or interest may apply if you pay back the loan early.

money jar

How do I go about repaying loan debt early?

If you decide to repay your loan debt early then you’ll need to give your lender notice – you can’t just give them all the money in one go and expect them to close the debt. In most cases, you’ll need to ask them for an ‘early settlement amount’ which is a recalculation of what you owe based on what you’ve already paid, what interest charges apply and whether they are any early payment fees.

Your lender’s obliged to give you at least 28 days to mull it over and have a look at all the figures in the quote. You don’t have to pay off the loan if you decide you’d be better off continuing with your monthly instalments. But if you have asked for one then your lender must provide it.

Finding a loan

Of course, when you look for a loan, it always helps to know the ins and outs upfront and before you sign on the dotted line. Which is why you should compare the market to see what’s on offer – we’re all for making life straightforward, so with our easy to read tables with key features clearly shown, why make looking for a loan hard when it could really, really simples?

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