It's a legal right for personal loan customers to settle their loan in full early or to make overpayments on their loan account.
Customers can request an early settlement figure at any time, although it's worth remembering that lenders can charge early repayment fees to recoup their losses.
Remember to assess your personal circumstances to check that paying off the debt quickly will not leave you at risk of taking out riskier forms of credit.
Paying off a loan early
Customers can choose to pay off a personal loan early in full or they can choose to make overpayments on their loan to help pay it off more rapidly.
It's a legal requirement in the UK for personal loan providers to allow customers to repay early or make overpayments on their loan, with the ability to make overpayments added thanks to the implementation of the Consumer Credit Directive (CCD) in 2011.
These rights give borrowers more control over their repayments and ensures that they can settle their loan early if they want to.
However, there are some charges that personal loan providers can impose if customers want to repay or overpay on their loans.
The majority of personal loan providers will charge customers for repaying or overpaying as we discuss below.
At the time of writing, Nationwide allow customers to repay or overpay without extra charges. This can be done through the online portal or via the telephone.
Most other lenders including big-name banks like NatWest and Lloyds Bank will charge fees if a customer wants to repay early or overpay.
Repaying a loan in full
Early repayment of a personal loan usually attracts early repayment charges (ERCs).
Providers are restricted when it comes to how much these can be. The maximum allowed under The Consumer Credit (Early Settlement) Regulations 2004 is:
- For loans with less than 12 months to run, providers can charge up to 28 days' interest
- For loans with more than 12 months to run, providers can charge up to 58 days' interest
Remember, interest on a loan is charged on the balance outstanding each month. This means there will be more interest due on a loan with a large outstanding balance than one that has just a few months left to run.
This doesn't mean that it's a bad idea to repay a loan early - it's just important to be aware that there will be more interest to pay earlier on in the loan period than if you're only a few months from total settlement.
To see how full settlement works, here is the example NatWest use on their website to help borrowers understand how much it will cost to pay back a five-year loan halfway through the term (and how much it will save in the long run):
|Original loan amount||APR||Monthly repayment||Early repayment charge||Net interest saved|
As NatWest's figures show, then, settling early will save money in the long term, but that is an extra amount customers will need to pay upfront when they settle the loan.
Lenders can apply extra fees if the loan is for more than £8,000 but these are also regulated. Loan providers can charge one of the following:
- The remaining interest
- 1% of the amount repaid early (if the loan agreement has more than a year to run)
- 0.5% of the amount repaid early (if the loan agreement has a year or less to run)
These extra charges are supposed to be fair to both sides, ensuring borrowers are not unfairly penalised for settling early and that lenders cover their costs.
Making partial overpayments
Thanks to the Consumer Credit Directive rights that are enshrined in the Consumer Credit Act, borrowers can make overpayments on their personal loan at any time.
This means we can pay off our debts more rapidly if we suddenly have a windfall or are in a position to clear more of the loan every month.
Once again, there are charges that lenders are allowed to levy if we decide to make overpayments for a loan totalling £8,000 or more over a 12-month period.
If we want to overpay by more than £8,000, lenders can charge:
- 1% of the overpayment amount (if the loan agreement has more than a year to run)
- 0.5% of the overpayment amount (if the loan agreement has a year or less to run)
It's still possible that other charges could be levied if a borrower wants to overpay by less than £8,000 in a year if the lender objectively believes they are missing out on a good return on their initial investment.
This could be the case if interest rates are much lower than when the loan was taken out, so re-lending the money to another customer would not yield as much of a return.
As with all full repayments and overpayments, a lender needs to be clear about any fees.
How to pay your loan early
Customers must give notice to their lender that they want to overpay.
The way to do this depends on a lender's processes. It could be:
- Through an online form or online account
- Sending an email to a specific department
- Calling the lender on the phone
- Visiting a branch
- Sending a letter
While these last two measures may seem archaic, some lenders might still make customers jump through those hoops. For example, Metro Bank's website suggests customers will need to visit one of their branches to pay off their loan.
On request, lenders will provide a settlement figure based on whether a customer has told them they want to repay the loan in full early or whether they want to make an overpayment.
The settlement figure is valid for 28 days and customers must settle within that period.
However, just because a customer has requested one, it doesn't mean they have to go through with the repayment or overpayment if they change their mind.
After the 28 days, customers will need to apply for a new settlement figure and any interest that should have been added during that 28-day period will be applied to the account.
Beware of scams
One important point: when dealing with a lender about early repayments or overpayments, it's crucial to ensure you're speaking to your lender and not a scammer.
Only contact them via the methods provided on their website or in your loan documentation and, if anything doesn't add up, don't hesitate to try a different way of contacting them.
For example, if the bank requests contact via a specific email address but the person responding to those emails is providing information that sounds false (suggesting money should be paid to a different account, for instance), going to a lender's website and starting a live chat or calling them directly to check the information is correct is absolutely allowed.
No lender will criticise customers for taking steps to keep their money secure and it's worth taking those extra steps to ensure you're communicating with the right people.
Equally, if a lender contacts you suggesting you repay early or overpay, double-check the request is coming from them and that it is not a scam attempt.
Loan scams come in all shapes and sizes, so don't be afraid to step back and say no.
Can a lender refuse early repayment?
No, a lender must allow customers to repay their loan early or make overpayments during the duration of their term.
As we've discussed, there are reasonable charges they can apply in some circumstances, but they cannot refuse to allow customers to repay early or overpay.
This doesn't mean it's always straightforward and some lenders may mistakenly give the impression that customers are not allowed to make these payments or refuse to supply an early settlement figure when requested.
If this happens, customers should complain in writing to the lender and request again that they supply a settlement figure or confirm what charges would be applied for early repayment or overpayment.
Customers can escalate the complaint to the Financial Ombudsman Service for free if they do not get an adequate response from the lender. Just the suggestion that a customer will approach the Ombudsman is usually enough for a lender to remember their responsibilities and act accordingly.
Should you repay a loan early?
Early loan repayment or overpayments can help us clear our debts more quickly. If we're in a position to do so, it could mean we save on interest in the long-term and have more control over our finances each month because there will be less going out.
However, repaying a loan early in full does mean that we're making a large upfront payment, so it's important to make sure our finances can handle that.
It's not a good idea to repay a loan debt early with another type of high-interest credit or trying to settle a loan early when our monthly expenditure is already tight.
Similarly, making large overpayments that we can't afford will put us at risk of taking our more credit in the short-term to bridge any gaps.
Paying off a personal loan each month is an ongoing financial commitment, but it is usually one that comes with a fixed rate of interest, unlike credit cards where lenders can undertake risk-based repricing and put a customer's interest rate up with just a month's notice.
So, continuing to pay a personal loan early month is a better idea than switching to any form of debt with variable interest rates.
In addition, be wary of debt consolidation offers that can turn an unsecured debts into debts that are secured on a person's home instead. These are not always in the best interests of the borrower.
Choosing to pay off a personal loan early could negatively affect a customer's credit score.
This is because credit reference agencies see regular repayments as a good thing for a borrower - it proves they are in control of their borrowing and able to meet their responsibilities each month. This can help a customer build their credit score over time.
So, counterintuitively, it can seem to credit agencies that we're not handling our credit effectively if we choose to pay off a loan early in one large sum because we won't then have those regular repayments on our account.
Closing a credit account can also negatively affect a credit score temporarily because it means one of the avenues of credit we have has been closed permanently.
With a personal loan that has a fixed end date, this is hazard of repayment but it will only cause a temporary blip.
Summary: Early settlements and overpayments
Repaying a loan in full early or making overpayments to reduce the overall debt are great options for people in a financial position to make those decisions.
Lenders must legally allow borrowers to repay early in full or make overpayments when they wish to, although there are fees associated with this in some cases.
It's important for customers to get a settlement figure from their lender to work out exactly how much they will need to pay upfront and how much (or how little) they will be saving by repaying or overpaying.
However, remember to check whether repaying a fixed rate loan early is going to lead to other forms of variable rate credit being used instead, and be aware that there might be a short-term hit to credit ratings if a loan is repaid in full.
Taking control of our debts and making extra payments when we can is a useful tool, but remember to look at the whole picture rather than thinking of the unsecured personal loan on its own.
For more information, read about the five things to know about dealing with debts and which one are the most important.