Can you pay a loan off early?

Can you pay a loan off early?

When you take out a loan, you agree to repay it over a specified length of time that suits you and the lender. But if your circumstances change during this period – for example, if you come into some extra cash – you could be able to repay it earlier and save money on future repayments.

However, repaying a loan early isn’t right for everyone and every loan, so it’s worth researching your options carefully. Read on to learn more about how paying a loan off early works and whether it’s worth it.

Can I pay off a loan early?

Under the Consumer Credit Act, lenders in the UK must allow you to repay personal (unsecured) loans early in full. We only offer secured loans at Evolution Money, but you still have the right to settle your loan agreement early. However, it’s important to know that you may pay an early repayment charge (ERC) and possibly further fees for doing so. ERCs vary between lenders and different types of loans.

Details of any fees and how they’re calculated should be included in any loan agreements you sign, so you know what to expect from the start. This could be in a personal loan agreement or a binding mortgage offer for a secured loan.

Lenders charge early repayment fees because they receive less money than expected in interest when a loan ends early. Be aware that not all lenders call this an early repayment charge (we do), so it’s wise to check with them what these fees might be.

If you pay a loan off early, is it cheaper?

Saving money is the main reason people choose to repay loans early.

Loans typically build up interest charges over the full term, so by repaying sooner you could reduce how much is added to your overall total. However, whether this is cheaper for you depends on whether the potential interest savings outweigh the early repayment charges.

You can find out how much it will cost you to repay early by contacting your lender and asking for a settlement figure. This will include:

• How much you’ve paid so far and the outstanding loan amount
• What interest charges you’ll need to pay
• Any Early Repayment Charge
• Any further charges that apply (detailed in your loan agreement)

How much could I save with early repayment?

So, can you pay your loan off early and avoid lots of interest?

Ultimately, the amount you could save depends on the size of your loan, the interest rate, and how long you have left on the repayment term.

Your savings will generally be larger the longer you have left on your loan term and the higher your interest rate. If you only have a few months of repayments left and your loan comes with low interest and early repayment charges, you could even pay extra.

How do I go about paying off a loan early?

After contacting your lender and receiving a settlement figure, you have 28 days to decide whether to go ahead and pay it or not. You’re not obliged to do so; you’ll just need to ask for another settlement figure if you later decide to repay your loan. You may be able to complete this process online.

Does paying a loan off early affect my credit score?

One of the benefits of sticking to a consistent loan repayment schedule is improving your credit score, as it shows providers that you’re able to borrow responsibly.

Paying off a loan early means you’ll be closing a line of credit and won’t have as much evidence in your favour, which could impact your credit score negatively. However, this effect is likely to be minor – much smaller than missing a loan repayment, for example.

Can I repay some of my loan early, rather than all of it?

If you don’t want to repay your loan in full, making overpayments could be a more manageable option. An overpayment is when you repay more than your regular monthly amount. This will still help you pay off your loan sooner and reduce the amount of interest charged, just not to the same extent as repaying in full.

You can make overpayments on a one-off or regular basis. The best way to pay a loan off early will depend on your financial situation and the terms of your loan. Some lenders set a limit on how much you can overpay each year while others don’t allow overpayments at all, so check your agreement.

Can I cancel a loan instead?

When you take out an unsecured loan, you’re typically given a 14-day ‘cooling-off’ period by law. If you change your mind or your circumstances suddenly change during this period, you can contact your lender and cancel the loan entirely.

And if you’ve already received your funds in this time, you’ll need to repay it in full quickly – typically within 30 days – to avoid paying any interest.

The process is slightly different for mortgages and secured loans, like the ones we offer at Evolution Money. With these, you have a 7-day reflection period to consider the terms before accepting or rejecting a binding mortgage offer.

How else can I save money on a loan?

It’s helpful to know that repaying your loan early isn’t the only way to save on interest payments. You could also refinance or reduce your loan term.

Refinance

Refinancing means taking out a new loan with a better rate and using it to pay off your existing, more expensive one. This is commonly known as a debt consolidation loan. It could be a good option for you if interest rates have fallen since you took out your original loan or if your credit score has improved.

You’re still likely to face early repayment charges, but the savings offered by a lower interest rate could make it worth it.

Reduce your loan term

Reducing the length of your loan means reducing your number of repayments, which reduces how much interest is charged. It’s like making overpayments, just on a committed, consistent basis.

Your new monthly repayments will be larger, so you’ll need to assess whether you can afford them. If you can’t, late payment fees could quickly wipe out any savings you make from paying less interest in the long term.

Not all lenders will be willing to change your loan term, either.

So, is repaying a loan early a good idea?

Ultimately, whether repaying early is worth it depends on your personal situation and the terms of your loan agreement. Ask yourself the following questions to help you make that decision:

• What are the early repayment charges? If you pay your loan off early, is it cheaper than sticking to your repayment schedule?
• Can you comfortably afford to repay early alongside your regular expenses?
• Do you have other bills that need paying off first, such as rent, mortgage or utilities?

If you can confidently afford to repay early and the saving on interest is more than what you’d pay in early repayment charges, it could be worth doing it.

Compare your borrowing options with Evolution Money

At Evolution Money, we offer secured loans for homeowners of up to £100,000 with terms ranging from three to 20 years. Whether you’re looking to consolidate existing debts or researching how early repayment works before applying for a loan, we could be able to help. Check your eligibility today.

For more simple financial guides like this one, visit our help hub.