Can You Repay a Loan Early?

Yes. You can normally repay a regulated personal loan early in the UK. You may be able to clear the full balance or make a partial repayment that reduces what you owe.

1. 1

   Ask

   Get an official settlement figure from the lender.

2. 2

   Compare

   Compare it with every repayment you have left.

3. 3

   Decide

   Consider the saving and what paying now would leave in your bank account.

Paying early can reduce the interest you pay because you are borrowing the money for less time. However, the amount required to close the loan may not be the same as the balance shown in your online account.

Before sending money, ask the lender for an official early settlement figure. This tells you how much must be paid, when it must be paid and whether any permitted interest or compensation has been included.

Do not calculate the final payment yourself or simply transfer the balance displayed in an app. A small amount could remain outstanding and the loan may stay open.

Start with the settlement figure

An early settlement figure is the amount the lender requires to close the agreement on a specified date.

It may include:

• The remaining loan balance
• Interest calculated up to the settlement date
• Any amount the lender is legally permitted to include
• A rebate for interest and credit charges that no longer need to be paid

The figure should also state how long it remains valid. If you pay after the stated date, ask the lender for a new figure.

The easiest way to request it is through the lender’s online account, customer service team or the contact details shown in the credit agreement.

The three numbers that matter

The result shows the basic cash difference between settling and continuing with the current payment schedule. It does not decide whether using the money now is right for you.

Early repayment comparison

A simple example

Suppose you have 12 repayments of £180 left.

In this example, settling would reduce the remaining loan cost by £260.

This does not automatically mean paying early is the best choice. The borrower must also consider whether using £1,900 would leave enough for normal living costs, priority commitments and unexpected expenses.

The figures above are invented to show the method. They are not a quote and not a representative example for the lenders on our panel.

Why the settlement figure may be higher than expected

Paying early does not always mean paying only the balance visible today.

The Consumer Credit Act and the Consumer Credit (Early Settlement) Regulations 2004 set out how early settlement and the rebate of future credit charges are calculated. Depending on the agreement and circumstances, the calculation can include a limited period of interest after the borrower gives notice.

The Financial Conduct Authority has explained that the statutory calculation can result in an amount equivalent to as much as 58 days of interest in some circumstances. This does not mean every lender will add 58 days of interest or that every agreement will produce the same result.

The practical answer is to request the figure and ask the lender to explain anything you do not understand. Not every amount included in a settlement figure is a penalty or a fee.

Can a lender charge you for repaying early?

A lender cannot simply add any charge it chooses.

For regulated consumer credit agreements, additional compensation for early repayment is only allowed in particular circumstances and is subject to legal restrictions.

One important threshold applies when a repayment made under the early settlement rules exceeds £8,000, or relevant repayments over a 12 month period exceed that amount. Further conditions and limits apply.

Not every loan carries a one per cent early repayment charge, and not every early repayment is free. The exact position depends on the agreement, the amount repaid and the relevant consumer credit rules.

If the settlement figure contains an amount you do not understand, ask the lender:

• What is this amount called?
• Which term of the agreement permits it?
• How was it calculated?
• Has the rebate of future interest been included?

Full settlement and partial repayment are different

Full early settlement

Full settlement means paying the amount required to close the loan completely.

After payment, ask the lender to confirm in writing that:

• The loan has been settled
• The balance is zero
• No more payments are due
• Any Direct Debit or recurring payment instruction can be cancelled

Do not cancel the payment instruction before checking how the lender plans to collect the final amount.

Partial early repayment

A partial repayment reduces the balance without closing the loan.

Depending on how the lender applies it, the payment may:

• Reduce the remaining number of repayments
• Reduce the amount of future repayments
• Change the final repayment
• Produce a rebate of some future credit charges

Do not assume how it will be applied. Tell the lender that the payment is intended as a partial early repayment and ask for a statement showing its effect.

A casual extra payment and a formal partial early settlement may not be processed in the same way.

Will paying early always save money?

Paying early will often reduce the remaining interest, but the real saving depends on the settlement figure.

The saving may be small when:

• The loan is close to its final payment
• Most of the remaining amount is capital rather than interest
• The settlement calculation includes permitted additional interest
• The borrower must use costly credit again after spending their available cash

This is why the decision should not be based only on the words “interest saving”. The APR and total cost of the loan show what the remaining borrowing really costs.

Five questions to consider before paying

1. 01

   Is the figure official?

   Use a current settlement figure supplied by the lender.

2. 02

   Will you still have enough for essentials?

   Consider housing, food, energy, transport and other necessary spending.

3. 03

   Do you have priority arrears?

   Missing rent, mortgage payments, council tax, energy bills or certain other commitments can have more immediate consequences than an unsecured personal loan.

4. 04

   Do you have more expensive borrowing?

   Compare the rates and remaining costs rather than automatically clearing the smallest balance.

5. 05

   Where is the settlement money coming from?

   Using savings is different from taking another loan. Replacing one debt with another is not automatically cheaper. Compare the total repayable, term, fees and monthly commitment before refinancing.

These questions are prompts for your own decision. They are not a recommendation and no answer is checked or approved by us.

Can early repayment improve your credit score?

Paying off a loan early does not guarantee that your credit score will rise.

The lender should update the account to show that it has been settled. Your previous payment history will normally remain part of your credit file for the relevant reporting period. You can check your credit file for free once the lender has had time to update it.

Credit reference agencies calculate scores differently. Lenders also use their own affordability and risk assessments. Closing a loan can therefore affect different people in different ways, and it does not remove information that counts as bad credit if that information is accurate.

The main benefit of early repayment is reducing or removing the debt. It is not a quick credit score trick.

How to repay a loan early safely

• Check the loan agreement for the early repayment section.
• Ask the lender for an official settlement figure.
• Check the date until which the figure is valid.
• Compare it with all the repayments still scheduled.
• Ask the lender to explain any additional amount.
• Confirm the correct payment method and reference.
• Keep proof of the payment.
• Ask for written confirmation that the balance is zero.
• Check your bank before cancelling any Direct Debit.
• Check your credit file after the lender has had reasonable time to update it.

Lenders and credit reference agencies update on their own schedules, so there is no fixed number of days by which your file will change.

What if the lender’s figure looks wrong?

Contact the lender and ask for a breakdown. Explain which part you believe is incorrect and provide any relevant statements or payment records.

If the issue is not resolved, use the lender’s formal complaints process.

The lender should issue a final response explaining its decision. If you remain unhappy, you may be able to refer the complaint to the Financial Ombudsman Service.

Frequently asked questions