Is it possible to pay off loan debt early?
The answer is that it depends on the type of loan you’ve taken out and the terms and condition of your loan agreement. There are two ways that you can pay off loan debt early:
- you can pay off the loan in full
- partially clear some of the balance
If you make a partial overpayment you can then go back to your normal repayments. Or you could ask your lender if they will restructure your payment schedule, so that you pay a higher amount each month than you were before.
Any loan that falls under the Consumer Credit Act must allow you to pay it off early and reduce the total amount that you need to pay. Credit that falls under the Consumer Credit Act can include:
- personal loans
- payday loans
- credit cards
- purchase hires
- store cards and store finance
If your loan doesn’t fall under the Consumer Credit Act you may still be able to pay it off early – check the terms and conditions of your loan or speak to your lender.
Paying off a loan early is known as ‘settling the loan’ and the main advantage is that you won’t have to make more payments over a long period of time. However, you may have to pay extra fees, so it’s crucial that you read the terms and conditions of your loan before deciding to pay it off early.
What to check before you request early repayment
Before you request early payment make sure you check the following three points in order to make the best decision for your financial circumstances:
- Are you still in your cancellation period? If you signed the credit agreement within the last 14 days then you’re in your cancellation period, otherwise known as a ‘cooling off period’. This means that you can cancel the loan with no extra charges.
- Does the Consumer Credit Act apply to your loan? If it does then there will be information explaining this on the first page of your credit agreement. How the loan was organised, such as over the phone or face-to-face doesn’t affect whether it falls under the Consumer Credit Act. Make sure you check your contract to see if it applies to your loan - before requesting to pay the balance early.
- Are you prioritising any outstanding debts? If you have more than one debt, you need to pay off any priority debts first. Priority debts include things like rent or mortgage payments, council tax, bills, unpaid tax and payments for goods bought on purchase hire. Non-priority debts include unsecured loans, credit cards, store cards, parking fines and your water bill. If you’re unsure which of your debts are priority seek information from Citizen’s Advice.
Who do I need to speak to about paying my loan balance?
Before deciding to pay off your loan balance early you need to speak to your lender about restructuring your repayments. Ask them to put in writing the total amount you need to pay in order to clear the loan. This is called an ‘early settlement figure’. The lender must include all interest and charges you’ll need to pay in the early settlement figure.
If you choose to take the lender up on their early settlement offer, you’ll then have 28 days to pay the full amount. If you change your mind and no longer want to settle the loan early, you can carry on making your repayments as normal.
What additional charges apply when paying off loans early?
If you pay off your loan early you may incur additional fees or charges. If your loan is under £8,000 providers usually charge you around one or two month's worth of interest. This can be higher depending on the terms and conditions of your loan.
With loans that are over £8,000, it’s likely that the fees will be higher. Some providers charge you the full amount of remaining interest. Others charge 0.5% on top of the amount to be repaid if you have less than a year left on your loan. Or 1% on top of the amount to be repaid if you’ve got more than a year left.
It’s possible that you only want to make a partial overpayment and then go back to paying your normal monthly amount. Different fees and charges apply for partial repayments and these are normally lower compared to repaying a loan early and in full:
- For loans that are in the last year of repayments and on which you wish to pay less than £8,000 in the next 12 months, you can’t be charged interest higher than 0.5% on the remaining amount. However there may be other fees.
- If you want to pay more than £8,000 in a 12-month period on a loan within the last year of repayments, you can be charged up to 1% interest plus other fees.
- For loans that have more than a year left of repayments and when you want to repay less than £8,000 in 12 months, you won’t be charged any interest. But you may still have to pay fees.
It’s important to note that lenders don’t have to allow you to make partial repayments on unsecured personal loans taken out before 1st February 2011 or on secured homeowner loans.
What happens if my lender won’t allow early repayments?
If your loan doesn’t fall under the Consumer Credit Act and the lender won’t allow you to make early repayments then unfortunately you won’t be able to make them. If your loan is covered by the Consumer Credit Act and the lender won’t let you make early repayments or ignores your request for repayments you should get free, legal advice from Citizen’s Advice.
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