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Early loan repayments
Is it worth paying off a loan early? How does it work?
24 May 2024
Typically, the quicker you pay off a personal loan, the cheaper the overall cost of borrowing, as you'll pay less interest. Though you must follow the correct process to repay early and most lenders charge early repayment fees. This guide has full info.
Who's this guide for? People with personal loans, wanting to know whether it's worth repaying their loan early or not.
Not what you want? If you’re looking to cut debt in other ways, see…
Loans | How to get a personal loan | Cut existing loan costs | Debt help | Check your credit report for free | Cheap car loans
1-min read on early loan repayments
If you've got extra savings or want to refinance your loan at a cheaper rate, repaying all or some of a personal loan early can help you save money on interest payments (as the longer you are in debt, the more interest you pay). However, make sure that these savings aren’t outweighed by early repayment fees.
1. Ask your lender for an early settlement amount. This will depend on how much you’ve paid so far, how long you have left on the loan, and their early settlement charge.
2. Can’t pay off in full? Check if you can partially overpay. Loans taken out since 1 Feb 2011 allow you to make partial overpayments.
3. Does the early repayment fee outweigh the interest saving? Lenders are allowed to charge a fee if you overpay more than £8,000 in a year, usually between one or two month’s interest. Check your agreement to find out the cost of paying back the loan early.
4. See if you can get a better rate. Loan rates are high right now, but it’s worth checking to see if you can get a loan at a cheaper rate to pay off your existing loan. Then you’ll have a similar debt, but with lower interest payments, reducing the amount you'll repay.
Can you pay off a loan early?
Yes, it's usually possible to repay most types of loan early. Under Consumer Credit Regulations 2004, lenders can charge you up to two month's interest if you decide to pay your loan off early. If your loan has less than one year left, lenders can only charge up to one month’s interest. Loans taken out since 1 Feb 2011 also allow you to make partial overpayments.
Check your individual agreement to see what your lender will charge you.
What types of loan can I repay early?
- Unsecured personal loans. These are what most people consider to be a standard loan. They require no collateral, but do require you to be creditworthy. You can usually repay early.
- Secured personal loans. These require some form of collateral (for example, your house or car) that lenders can seize if you default on your loan (are unable to pay). You should avoid these, they can be a nightmare, they give the lender security, not you.
- Short-term and payday loans. Avoid these at all costs. See our guide for other options.
- Car finance loans. There are a few types of car finance, whether you can repay early will depend on which type you have and the agreement with your lender.
- Mortgages. This guide mostly relates to personal loans, check our guide to see if overpaying on your mortgage can help you save in the long run.
- Student loans. If you’ve extra cash, you should repay other debts, or put the money in a savings account. Repaying your student loan often isn’t worth it.
How do you repay a loan early?
If you’ve extra cash or want to refinance your loan as you’ve found a cheaper rate elsewhere, you need to ask your current lender for a settlement figure. This will include your outstanding debt, any extra charges, plus any early settlement fee (typically one or two months’ interest).
Once the lender has provided a settlement figure, you’ll have 28 days to make the payment if you still want to repay. After that, you’ll have to ask for a new figure.
If you took out your loan after 1 Feb 2011, you can partially overpay your loan. If this is your intention, speak to your lender and tell them much you intend to partially overpay, and ask how much this will reduce your loan amount and future monthly repayments by.
Should I repay my loan early?
This is a very individual question – it depends on how much you’ve left to pay, your remaining loan term and how much your lender will charge you to repay early.
Repaying early can often be worth it, as you'll reduce the amount of interest you’ll pay. It can also have a positive affect on mental health, though it's crucial to ensure it's also the correct thing to do financially, as you may be charged fees.
There are three main options for repaying early, you can...
- Make partial or full overpayments with your savings.
- Take out a new loan at a cheaper interest rate to repay an existing loan (this is known as refinancing).
- Reduce the term of your loan. This will increase the amount you pay each month but will reduce the number of payments, meaning you'll pay less interest overall.
You're most likely to benefit from repaying early if you're near the beginning of your loan term, or if your existing loan has a high interest rate.
Are there any fees are involved with repaying early?
It depends. Loan providers must allow you to pay off your loan in full. This is sometimes subject to a penalty which is usually between one and two months' interest. Check your individual agreement to see what your lender will charge you.
Loans taken out since 1 Feb 2011 allow you to make partial overpayments. If your extra repayments total under £8,000 in a year, banks are not allowed to charge you a fee for making an overpayment. But if your overpayments total over £8,000 in a year then the bank is allowed to charge you so long as it has incurred a cost itself from you paying back the loan early.
These fees allow lenders (who undertake some risk by lending money to borrowers) to recoup some profit if borrowers choose to repay early and save on interest payments. It's crucial to take these fees into account when calculating if repaying early is right for you. Ensure the fees don't outweigh how much you’ll save by reducing the total interest you’ll pay.
Example of how repaying a loan early can save you £100s
Early repayment fees mean that it’s not always cheaper to pay off your loan early, particularly if you’ve not long left on your loan agreement or you’re only making a partial overpayment. But done right, you could save £100s or £1,000s on interest payments...
Ben takes out a £15,000 loan over three years with a 6% rate of interest. Each month Ben repays £455. The majority of this is used to reduce the debt owed, though a proportion of it is used to cover the interest charged by the bank. Each month, a bigger proportion of the monthly repayment goes towards reducing the debt owed, rather than paying interest. This means the earlier you repay a loan, the more you stand to save in interest.
The average monthly interest for Ben's loan is around £40 – if the lender imposes a two-month interest early repayment fee, he would be charged around £80 to settle his loan.
- Repaying after one year. Ben saves £655 in interest, leaving him £575 better off.
- Repaying after two years. Ben saves £180 in interest, leaving him £100 better off.
This clearly shows that you can make the biggest saving if you're able to repay early.
Is paying off a loan early a good idea?
A standard MoneySaving rule is to pay off debts before stashing money into savings (see Pay off debts with savings). In general, this is true with loans too, though due to the repayment fees you may be financially better off by sticking your savings in a high interest savings account instead.
For example, if you managed to save a lump sum and the total repayment figure of your loan was £5,000, yet repaying your loan as usual each month would only cost you £5,100 in total, you'd only save £100 by paying it off early.
Instead of overpaying, if you stashed that £5,000 in a top savings account you could earn far more (see Top savings for our top picks). If there's not much in it, or if you're unsure, err on the side of clearing your debts. It can also be a good idea to have an emergency fund if possible.
Struggling with debt? Get free help
To repay a loan early you need to be in control of your debt (you can afford to repay and you just want to cut the cost). But this isn't the case for everyone, so a different tack is better – full help in our Debt crisis help guide, but use these three questions to help you decide which route is right...
- Do you struggle to meet minimum monthly payments?
- Is your total debt (not mortgage/student loan) over one year's salary?
- Do you have sleepless nights or depression/anxiety over debt?
If you answer 'yes' to any of these, immediately get free, one-to-one debt-counselling help from Citizens Advice, StepChange, National Debtline or CAP (which gives emotional support too).
Are there any other ways to repay a loan?
We’ve covered repaying a loan through personal savings or refinancing (taking out a second loan at a cheaper rate and using it to pay off the original loan). If you’re loan is under £5,000, you could consider a money transfer credit card.
A money transfer is a type of credit card which pays cash straight into your bank account for a small fee. They often come with 0% interest periods, meaning you won’t be charged interest on the debt for a set number of months (though you do have to pay AT LEAST the minimum repayment amount).
These can be useful tools for paying off expensive debt – use the cash from the money transfer to repay your loan early, then you'll have a number of months at 0% interest on your money transfer debt. This gives you a break from paying interest, allowing you to really tackle the debt.
You'll need to be disciplined though, and ensure you don't slip into your overdraft or need to borrow again, or you'll be in even more debt. See our budget planner guide for more help.
Does paying off a loan early affect my credit score?
Yes, paying off a loan early can actually slightly hurt your credit score. This is because once paid off in full, the loan account will be closed. You will no longer have the active credit on your file, which means you're no longer demonstrating to lenders that you're able to make monthly repayments – your credit profile will be less diverse.
That being said, it’s often a good idea to pay off debts in full when you can and the impact to your score will likely be very minor. But just be aware in case you have important credit applications coming up such as a mortgage and don’t want any unexpected surprises.
Are you looking for a loan?
We've a range of loan guides and tools, but in short, if you’re looking for best buys, see...
- How to get a personal loan. This explains what loans are and how they work in detail, including the cheapest loan rates from £1,000 up to £50,000.
- Cut existing loan costs. If you already have a loan, this explains how to determine whether refinancing could be right for you.
- Loan eligibility calculator. This shows your acceptance odds for a variety of loans without it going on your credit file.
Spotted out of date info/broken links? Email: brokenlink@moneysavingexpert.com
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