Can I pay off a secured loan early?

Most lenders will allow you to pay off your secured loan early, but it’s important to make sure you can afford to. Some lenders will apply early repayment charges (ERCs) if you end your agreement before schedule.

6 min read
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Do you get charged for paying off a loan early?  

If you pay off a loan early, lenders lose out on interest. Therefore, many lenders (but not all) have penalties known as early repayment charges or early redemption fees. These vary from lender to lender depending on how much you have left to pay, but it tends to start at approximately one or two months’ interest. If you’re right at the beginning of your loan term, it’s likely these fees will be higher, as you tend to pay a higher proportion of interest at the start.

The exact cost of these fees will be detailed in your loan documentation, which you’ll receive before you sign your agreement. 

Is it cheaper to pay off a secured loan early?

For the reasons detailed above, it is not possible to definitively say whether it is cheaper to pay off a secured loan early, as it depends on your individual circumstances. You may want to consider: 

  • How much it will cost and how far into the loan you are –  ERCs tend to be higher towards the beginning of your loan as the lender would otherwise lose out on more interest.
  • How much you would save in interest by paying the loan off early – this can be found out using an early repayment loan calculator. 

Once you’ve calculated and weighed up the cost against the potential saving, you should have a better understanding of whether paying off the loan early is the right option for you. 

Pros and cons of paying off a secured loan early 

What are the benefits of paying off a loan early? 

The main benefit of paying off a loan early is that you may save yourself some money in interest. There are other potential benefits too: 

  • you’ll be free from monthly loan repayments which can make budgeting easier
  • your credit rating may improve, as the debt will be classed as ‘satisfied’ on your credit report
  • and you’ll have the satisfaction of having it paid off.

What are the drawbacks of paying off a loan early? 

Repaying a loan early isn’t without its disadvantages: 

  • you may face early repayment charges - exactly how much you’ll be charged will depend on your lender and your outstanding balance
  • if you’re paying a low interest rate, you may not save much money by paying it off early
  • you’ll need to carefully consider if you can afford to pay off the loan early – for example, will this affect your ability to pay priority bills, like your mortgage?

Tip: Ask your lender how much your loan would cost in total if you were to continue making monthly repayments, compared to how much it’d cost to pay it off early (including potential early repayment charges).

Reasons to pay off your loan early 

Secured loans may be taken out over many years, during which time your circumstances can change. If you find yourself in a position to pay off your loan early, you may consider doing so for one of the following reasons (among others):

  • if you’re selling your home - you could potentially use the proceeds of the sale to pay off your secured loan instead of transferring it to your new property
  • if you’ve found a better deal - you may want to consolidate your debt to get a lower interest rate. But bear in mind that consolidating your debts could extend your loan term, which can increase the amount of interest you pay in total.
  • if you’ve got savings - you might want to use savings to pay off the loan, so you don’t have to think about monthly repayments or pay any more interest (but remember, only use what you can afford)

Again, always remember to take potential early repayment charges into account.

Can a secured loan be written off?  

It’s very unlikely that a homeowner loan will ever be written off. This is because the loan is tied to an asset and tends to be for a large amount. However, lenders do occasionally write off debt in exceptional circumstances. If you feel like you are struggling to repay your secured loan, you should speak to your lender to see if they can do anything to help. Never simply stop paying without speaking to them, as this could put your home at risk. 

How to pay a loan off early 

So, if you’ve weighed up your options and decided you want to pay off your loan early, how do you go about it? Read on to find out.

If you want to pay it off in full 

To completely satisfy the loan (pay it off in full), there are three key steps: 

  • contact your lender to request an early settlement figure and confirm if early repayment charges apply
  • you can either repay the settlement figure in full or continue making your monthly repayments
  • should you choose to repay the loan in full, the final step is to clear the balance

That’s it – once you’ve made that final payment, the lender will cancel any recurring payments and mark the debt as satisfied on your credit report. Any record of the loan will drop off your report automatically six years after the date you settled the loan.

If you want to make a partial overpayment 

If you’re looking to reduce your loan term, you could consider making one or more partial overpayments – usually up to a limit set by your lender in the terms and conditions. An overpayment is exactly what it says on the tin – it’s a payment that’s higher than your usual monthly repayment. It reduces your remaining overall loan total, and so reduces your overall interest, too. Here’s how you do it: 

  • contact your lender - let them know that you intend to make an overpayment.
  • ask if there are any early repayment charges
  • ask how much you’ll have left to pay after the overpayment – also check the remaining loan term, and see if your monthly repayment amount will change
  • make the overpayment

How to avoid early repayment charges on loans 

You may be wondering if there’s a way to avoid early repayment charges on your loan if you want to clear your debt early. Unfortunately, this isn’t possible if these charges are stipulated in your agreement. This is one reason why it’s important to check the terms of your agreement before acceptance, as you may want to find a loan that is not subject to early repayment charges. If your loan does have early repayment charges and you wish to avoid them, remember to pay the exact amount of your monthly repayments and not a penny more (or less).

What happens if my lender won’t allow early repayments? 

Most lenders will allow you to make early repayments. In the unlikely scenario that they don’t, the best course of action is to raise a complaint with your provider. If you don't hear back, or you're unhappy with their response, you can get in touch with the Financial Ombudsman Service.

Can I cancel my loan? 

If you’ve changed your mind, you should speak to your lender in the first instance to see if you can cancel it, as there are lots of factors to consider, and they’ll be able to confirm the details of your specific product and contract.

Read our helpful guides to learn more about loans.

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