There are often times when we need to apply for a loan, and loans can be extremely beneficial to many people. However, none of us want to be in debt to anybody – so you may wonder if it’s possible to pay a loan back earlier than originally intended.

Can You Pay A Loan Off Early

The short answer is yes, but it depends on the lender – and you may find that you are hit with an early repayment fee. However, there’s plenty we need to unpack here. 

So, to try to fully explain how this process works, we’ve written this useful guide which hopes to clear up any confusion you may have about paying off a loan early. 

Ready to know more about this? Read on and learn with us!

Is It Possible To Pay A Loan Off Early?

So, as we mentioned, generally it’s possible to pay a loan off early. However, it’s critical that you look out for ERCs. ERC stands for early repayment charge, and normally when you apply for a loan – these charges (if any) will be outlined in the credit agreement. 

Now, even though a lender might tell you that there are no early repayment charges, it’s still worth keeping an eye out for other hidden fees and charges that you may have previously been unaware of. 

Lenders are bound by the Consumer Credit Act, and according to Consumer Credit Regulations 2004, lenders can charge a maximum of two months additional interest charges for early loan repayments. 

However, not all lenders will be up front about these charges, and some unscrupulous lenders may even add other charges which are not ERCs onto the cost. Therefore, it’s critical that you keep your eyes peeled with this.

How Much Are ERCs?

The overall cost for paying off a loan early will largely depend on the lender you have borrowed the money from, what the type of loan is and your own circumstances.

Under the Consumer Credit Regulations 2004, the following rules apply:

  • If there are less than 12 months remaining on the loan agreement, lenders may apply 28 days additional interest charges. 
  • If there are more than 12 months remaining on the loan agreement, lenders may apply an extra calendar month’s worth of interest charges. 

So, you could in theory be charged either one or two months extra interest charges. However, lenders could apply further charges if your loan is larger than £8,000. These are:

  • 1% of the overall amount that is repaid early (if there are more than 12 months left on the loan agreement). 
  • 0.5% of the overall amount that is repaid early (if there are less than 12 months left on the loan agreement). 
  • Any remaining interest prior to the rebate.

The best way to put your mind at ease is to speak with the lender first before you attempt to make any early repayment decisions.

How Would I Know If There Are Early Repayment Charges?

How Would I Know If There Are Early Repayment Charges

So, as we said – the best way you could find out if there are any repayment fees for settling early is by speaking with the lender directly. Alternatively, you could check to see if the ERCs are outlined in your credit agreement. 

However, other than this, you can check online and find your specific lender. You may find if they are known for charging ERCs and they may even advertise it on their website. 

Some lenders that are known to charge ERCs include, but are not limited to the following:

  • Admiral 
  • Halifax 
  • 118 Money 
  • Lloyds Bank 
  • TSB 
  • Tesco Bank 
  • First Direct 
  • Natwest 
  • HSBC 

You may also wish to know some lenders that are known not to charge ERCs. These include, but are not limited to the following:

  • Avant Credit 
  • Nationwide 
  • Lendable 
  • Metro Bank
  • Starling Bank 
  • Post Office Money 
  • First Trust Bank 
  • Lending Works 
  • John Lewis Financial Services

Of course though, these are subject to change at any given time, so it’s always important that you check directly with your lender. 

Are There Advantages To Paying Off A Loan Early?

It really depends on your loan type and your lender. Generally, it’s not the best idea to repay a loan early – just in case you are hit with ERCs. However, sometimes you can save money overall by repaying a loan early. 

For example, if you have taken out a large loan and then repay the loan back in full very early – you could find yourself saving thousands of pounds in interest costs. However, this advantage will not be the same if you only have a few months left on the loan term. 

One of the biggest advantages to paying a loan off early however is the fact that you are out of contractual payments which could leave you in debt. If you are the type of person who is not great with their money and you have the means to repay – it might be right for you. 

If you have to weigh up the risks of getting into debt over some early repayment fees, then you’ll likely be better off paying the charges! 

How Would I Pay Off A Loan Early?

If you are thinking about paying your loan off early, the first thing you have to do is contact your lender and ask them about the process. They will need to speak with you regarding any potential charges and procedures. 

Request an early settlement amount and if you agree to it, your lender will give you 28 days to pay this figure off. If you miss this deadline, you will need to reapply for the settlement amount. 

It’s important to note that an early settlement is not the same as an overpayment.

The Bottom Line

Paying off a loan early can incur some extra costs, but it might be the right move for you. Be sure you assess your options carefully first though!

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