Repaying a loan early
Written by
Joe Towner
Reviewed by
Amy LancashireUnder the Consumer Credit Act 1974, you have a legal right to pay off most regulated loans earlier than scheduled, either in full or in part, and doing so usually saves you money on interest. The main thing to watch is the cost: a lender can add up to 58 days' interest to your settlement figure, and mortgages or loans secured on your home can carry larger early repayment charges.
Here's how repaying early works, what it can cost, and how to decide whether it's worth it.
Can you repay a loan early?
For most standard personal loans, yes. The Consumer Credit Act gives you the right to settle a regulated loan early, and you can either clear the whole balance or make a partial overpayment to reduce what you owe.
This applies to unsecured loans regulated under the Act. Loans secured on your home, including mortgages, work differently and are covered in the FAQs below.
What does it cost to repay a loan early?
When you settle a loan early, the lender recalculates the interest so you're not paying for the full original term. But they're allowed to charge some extra interest to cover part of what they lose, under the Consumer Credit (Early Settlement) Regulations 2004.
How much depends on how long is left on the loan:
if 12 months or less remain, the lender can charge up to 28 days' interest
if more than 12 months remain, they can charge up to 58 days' interest (28 days plus a further 30)
This is why an early settlement figure is a little higher than simply your outstanding balance. It isn't a penalty as such, and in most cases it can be far less than the interest you'd save by clearing the loan early. If you're making a partial overpayment rather than clearing the loan, different limits apply. For loans taken out since 1 February 2011, you can usually overpay up to £8,000 in any 12-month period without a charge. Above £8,000, a lender can charge up to 1% of the amount you overpay, or 0.5% if less than a year is left on the loan. Terms vary, so it's always worth checking your loan agreement.
How to repay a loan early
The process is straightforward:
Ask your lender for an early settlement figure. This is the exact amount needed to clear the loan on a set date. You can usually request it online, by phone or in writing.
Check the figure. It shows your remaining balance plus any extra interest or charge. Compare it against the interest you'd pay if you kept the loan running.
Make the payment. Settlement figures are usually valid for around 28 days. If you don't pay within that window, you'll need to request a new one.
To make a partial overpayment instead, tell your lender how much you want to pay and ask whether it will reduce your monthly payments or shorten the term.
Is it worth repaying a loan early?
Usually, yes, if you can afford it. Clearing a loan early cuts the total interest you pay and frees up your monthly budget. But it's worth weighing a few things first:
Compare the saving against any charge. In most cases the interest you save outweighs the extra 58 days' interest, but check the numbers on your settlement figure.
Keep an emergency buffer. Don't empty your savings to clear a loan if it would leave you without a safety net.
Clear pricier debt first. If you have higher-interest borrowing, such as credit cards, paying that down usually saves more than overpaying a lower-rate loan. Consolidating debt is another option worth understanding.
If you're repaying early because you're finding payments hard to manage, our guide on what to do if you're struggling with debt can help.
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
