Paying off a loan early: Is It Worth It? - NerdWallet UK (2024)

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  • Can I pay off a loan early?
  • What are early repayment charges?
  • Why do providers charge early repayment fees?
  • Should I pay off a loan early?
  • Does paying off a loan early hurt your credit score?
  • How to pay off a loan early
  • How else can I save money on a loan?
  • Can I complain about an early repayment charge?

When you take out a personal loan, you will repay it over an agreed term. However, if you have some money saved up or have come into some extra cash you could choose to repay the loan early.

Paying off a loan early could save you money in the long term as it can reduce the total amount you need to repay. Bear in mind that you need to account for any early repayment charges to help decide if it’s the right choice for you.

Read on to find out more about how you can pay off a loan early, the charges you may face, and whether it’s worth doing.

At a glance:

  • Paying off your loan early will usually save you money on future interest payments.
  • Typically, you can pay off your loan in full or make a partial payment to help you clear your debt quicker.
  • But be aware that some lenders may apply up to two months of interest charges or early repayment fees to settle your debt in full.

Can I pay off a loan early?

Unsecured personal loans are usually covered by the Consumer Credit Act, which gives you the right to pay it off early.

You could choose to either pay the loan off in full and clear your debt or make an overpayment to pay off some of your outstanding balance.

If you want to pay off your loan in full, you will need to contact your lender for a settlement figure. Once you pay this figure, your debt will be cleared.

The settlement figure will include the cost of the remaining capital left to pay, plus a certain amount of interest and, if applicable, any other charges. How much it costs to pay off a loan early will be explained in your loan agreement and can vary between lenders.

If you want to make an overpayment and pay off just a part of your total loan early, you should be able to do so. However, the way this works will depend on the lender. Some may allow you to make an extra payment online or via their mobile banking app, while others will need you to contact the lender directly to arrange payment.

As with early repayment, how you make an overpayment will depend upon the conditions of the loan, which will be set out in the agreement signed when you took it out.

Can I cancel my loan?

If you took out the loan less than 14 days ago, you are still in the ‘cooling-off period’. This means you can contact the lender to cancel your loan entirely and, as long as you repay the money you received within the period it specifies, you won’t be charged any extra costs. For example, lenders may give you 30 days to repay the loan after you say you want to cancel the agreement.

What are early repayment charges?

When you repay a loan early, you will typically need to pay a certain amount of interest and, in some cases, a further fee. However, there are a few lenders that won’t apply any charges, including any additional interest charges beyond the period where the money has been borrowed, to clear your debt in full.

Confusingly, some lenders refer to the interest you have to pay when you settle a loan early as an ‘early repayment charge’ while other lenders don’t call it this. Read the terms of your loan agreement to see exactly what charges apply.

The amount you will be charged to repay a loan early often depends on the amount you borrowed and the amount you have left to repay.

Under the Consumer Credit Act, lenders can charge up to 28 days’ interest if your loan term was less than 12 months.

They can charge up to 58 days’ interest if your loan term was for more than 12 months.

In some cases, lenders may be allowed to charge further fees if you make an overpayment or pay off your loan in full.

You shouldn’t be charged a fee if you pay less than £8,000 over the course of 12 months.

However, lenders are allowed to charge further fees if you pay more than £8,000 over 12 months. This applies to single payments of more than £8,000 or if you make multiple payments in a year that add up to more than £8,000.

These fees could be:

  • 0.5% of the amount repaid early if there is less than 12 months remaining on your loan agreement.
  • 1% of the amount repaid early if your loan agreement has more than 12 months remaining.

Bear in mind that these rules apply to loans taken out from February 2011 onwards.

Why do providers charge early repayment fees?

Providers are allowed to charge these fees because when you take out the loan they calculate the amount of time it will take you to pay back, and the interest it will charge you for doing so. By ending the agreement early, the provider ends up with less money in its pocket, so it can reclaim a little of this through early repayment charges.

Should I pay off a loan early?

Only you can decide if repaying a loan early is the right decision. You should check the terms of your loan agreement to find out how much the lender will charge to clear your debt.

To help you decide what to do, you should consider:

  • How much will it cost you? How much interest would you save?
  • Could you still afford your everyday expenses and other bills if you paid off your debt?
  • Would you have some money left as an emergency fund?
  • Do you have any priority debts that need paying off first, such as rent or mortgage payments, energy bills or council tax?
  • Do you have any loans, credit cards, or other forms of credit with a higher interest rate? If so, it may make sense to pay these more expensive debts first as you could save you more money in the long term.

If you can comfortably afford to pay off your loan and the money you save on interest is greater than the amount you have to pay in early repayment charges, then it may be worth considering paying off your loan in full.

Bear in mind that, even if you ask for a settlement figure from your lender, there is no obligation to pay it. Typically, you’ll have 28 days to accept the settlement figure. But if you change your mind, you can continue making your regular repayments.

If you can’t afford to pay off your loan in full, you could consider making a partial settlement.

Depending on the lender, paying off some of your loan early could either reduce your future monthly payments or shorten your loan term. Lenders should tell you how a partial settlement will affect your loan. Make sure you factor in the cost of any charges before making any payments.

Does paying off a loan early hurt your credit score?

While paying off a loan early can save you money, it’s worth considering that it could have a temporary effect on your credit score.

Making regular loan repayments until the end of the agreed term can help to improve your credit history as it indicates that you can manage your finances and that you are a responsible borrower.

Paying off a loan early means you will no longer be making these regular payments each month, which could affect your score. It also means your account with the lender will be shorter and so your record of making repayments on time will be smaller.

However, the impact to your score is likely to be minor, especially if you compare it to the effect that missing a payment could have. The benefits of paying off a loan early and the money you’ll save is likely to outweigh any possible impact to your score.

How to pay off a loan early

You may need to contact your lender if you want to pay off your loan early, although some lenders will allow you to settle your debt through your online account.

The lender will provide you with a settlement figure, which is the sum you have to pay to repay your debt in full. This will include your outstanding balance left to pay, plus interest and any fees the lender may charge.

If you decide to go ahead and repay the loan you will need to do this within 28 days of receiving the settlement figure.

How to make an overpayment

If you want to make an overpayment or pay off part of your outstanding loan, you should check with your individual lender for the exact way to do this.

Some lenders will allow you to make an extra payment online or via mobile banking, while other lenders will require you to contact them directly.

Before making the payment, make sure you know if you will need to pay any charges and how the extra payment will affect your loan.

In many cases, if you make an overpayment, your monthly payments will stay the same and your loan term will reduce, which means you’ll pay the loan off quicker. However, some lenders give you the option of keeping your loan term the same and using the overpayment to reduce your monthly payments.

You will usually save more money on interest by keeping your monthly payments the same and shortening your loan term.

How else can I save money on a loan?

It may be possible to lower the costs of your personal loan through refinancing or by reducing the term of the loan.

Refinancing to a loan with a lower interest rate

If you’re not able to pay off your loan in full, refinancing to a cheaper loan might be an option. If you can find a personal loan with a lower interest rate, this could work out as a cheaper option for you.

Remember, early loan repayment charges may still apply to the original loan so factor those into your calculations.

Reducing the length of the loan

It may be possible to reduce the length of time you’re paying back your loan, which should also mean you pay less interest overall as you pay off your loan quicker. However, your monthly payments would increase as a result.

Speak to your lender and see what your options are. It may agree to shortening the loan, but watch out for changes to your interest rate if it does.

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Can I complain about an early repayment charge?

From personal loans to mortgages, lots of different loans have early repayment charges applied if you clear the debt early. However, these charges need to be ‘fair’. If you think you’re being charged an unfair amount, you have the option to refuse to pay it and to continue with your loan agreement or to complain about the charge, first to your provider and then to the free Financial Ombudsman Service.

Image source: Getty Images

About the Authors

Rebecca Goodman

Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent.

Read more about Rebecca Goodman and explore their articles

Rhiannon Philps

Rhiannon has been writing about personal finance for over three years, specialising in energy, motoring, credit cards and lending. After graduating from the University of Cambridge with a degree in…

Read more about Rhiannon Philps and explore their articles

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Paying off a loan early: Is It Worth It? - NerdWallet UK (2024)

FAQs

Paying off a loan early: Is It Worth It? - NerdWallet UK? ›

When you take out a personal loan, you will repay it over an agreed term. However, if you have some money saved up or have come into some extra cash you could choose to repay the loan early. Paying off a loan early could save you money in the long term as it can reduce the total amount you need to repay.

Is there a downside to paying off a loan early? ›

Cons of Paying Off a Personal Loan Early

Paying off personal loan debt early has a few downsides: Namely, you may have less cash on hand in the short term. "If savings are used to pay off the loan, it may create a shortage in the borrower's emergency-use fund," Nitzsche says.

Do I save money if I pay a loan off early? ›

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.

Is it good to repay a personal loan early? ›

Generally, the longer your credit history, the better your credit score will be. Therefore, if you pay off a personal loan early, you could bring down your average credit history length and your credit score. How much of a change in your credit score will depend on your overall credit profile.

Should I keep my loan or pay it off? ›

Determine your debt-to-income ratio

If you have a high debt-to-income ratio near 43% (or more), you'll want to pay down some of your debt to improve your credit score. If your ratio is already under 10%, you're in a great position to use your cash for something else.

Do banks like it when you pay off loans early? ›

However, you may not always want to pay your loan off early. Some lenders — not all — charge a prepayment penalty, so it's worth checking your loan agreement before you decide to pay your loan off ahead of schedule.

Can paying off a loan hurt your credit? ›

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

What happens if I pay a lump sum off my loan? ›

Paying a lump sum off your mortgage will save you money on interest. It will also help you clear your mortgage faster than if you spread your overpayments over a number of years. But this option holds risk. If you needed the money back in an emergency, such as job loss, it could be difficult.

Is early repayment worth it? ›

Early repayment charges for personal loans are generally more cost effective the earlier you repay the loan. If you are close to the end of your repayment term, you might find that the additional interest costs you more than letting the repayment schedule run its course.

Is it worth it to get a personal loan to pay off debt? ›

As of November 2023, the average interest rate on a personal loan with a 24-month term was 12.35%, according to data from the Federal Reserve. So, by using a personal loan to pay off your credit card debt, there could be significant savings, as the average credit card rate is currently 21.47%.

What are the disadvantages of paying off debt? ›

Whether you're paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget. Consider where you'll get the money to pay off your debt — is it being diverted from your retirement savings plan?

Is it better to pay off all debt or save money? ›

While paying down high-interest debt will help you reduce the amount of interest you owe, not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense. “Regardless of [your] debt amount, it's critical that you have money set aside for a rainy day,” Griffin said.

Why is it good to pay off loans? ›

Over time, paying down debt has the potential to significantly improve your health and overall quality of life. No matter how small, any step toward becoming debt-free is a positive move in the right direction.

Is it bad for your credit to pay off an auto loan early? ›

In the short term, paying off your car loan early will impact your credit score — usually by dropping it a few points. Over the long term, it may rise because you've reduced your debt-to-income ratio. Whether to pay off a car loan early depends on your budget, interest rate and other financial goals.

Does loan prepayment affect credit score? ›

Prepayments or foreclosure do not impact the CIBIL Score for a personal loan. So, your credit score will not be affected in any way by this. Once you have paid off your loan in full, it will be marked as "closed" on your credit report.

Can you pay off a 72 month car loan early? ›

There are no legal restrictions to paying off your auto loan early but it may come with fees from your auto loan provider.

Is there a downside to paying off debt? ›

It May Negatively Affect Your Credit

When it comes to credit scores, there's a big difference between revolving accounts (such as credit cards) and installment loan accounts (such as a mortgage or student loan). Paying an installment loan off early won't improve your credit score.

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