Are you thinking about paying off a loan or mortgage earlier than planned?
It can feel like a huge weight off your shoulders to pay-off your debts sooner than expected, but is it always worth it? You might be required to pay a fee for the early repayment of the loan.
In this guide, we’ll explore the details of early repayment charges and provide you with everything you need to determine whether it makes sense for you.
What is an early repayment charge?
An early repayment charge is a fee that a lender will apply, in the event that you pay-off the remaining balance of your debt sooner than scheduled in the original agreement.
They can apply to personal loans and mortgages, as well as other forms of borrowing, like car finance.
These charges exist on some—but not all—lenders, so that they can recoup any missed profits that they would have otherwise earned in interest from your scheduled loan repayment plan.
How to calculate an early repayment charge
Early repayment charge amounts will vary between lenders and are usually a percentage of the remaining balance, rather than a flat fee.
They will also differ depending on the type of borrowing, each of which we will explain in more detail in the sections below.
Early personal loan repayment charges
Can I repay my personal loan early?
Depending on your choice of lender, yes, it is often possible to repay a personal loan early.
The reason for early personal loan repayment will usually be that you have enough money to repay the remaining amount and would like to clear the debt.
To find out if your loan allows for early repayment, you should check the original terms of the agreement. This will outline whether early repayment is possible, and whether a charge is applied.
How is a personal loan early repayment charge calculated?
The exact calculation will depend on your lender and the terms of your loan agreement.
Under the Consumer Credit Regulations 2004, a lender can charge up to two months’ additional interest if you choose to pay-off your loan early. This is reduced to a maximum of one month’s interest if your loan has less than 12 months left of its term.
For amounts over £8,000, other fees may apply. These might include:
- The remaining interest
- 1% of the amount repaid early, if there is more than a year left of the repayment term
- 0.5% of the amount repaid early, if there is less than a year left of the repayment term
What do I need to consider?
When deciding whether an early repayment charge on a personal loan is worth it, it can help to consider the following rules of thumb as a rough guide:
- Early repayment charges for personal loans are generally more cost effective the earlier you repay the loan
- If you are close to the end of your repayment term, you might find that the additional interest costs you more than letting the repayment schedule run its course
Early mortgage repayment charges
Can I repay my mortgage early?
Depending on the terms of your agreement, you can usually repay your mortgage early.
Reasons for early mortgage repayment might include:
- Remortgaging to a cheaper deal or a new lender
- Selling your home
- Overpaying your mortgage payments beyond the approved limit
To find out whether an early repayment charge is applied on your mortgage, you should check the terms of your original agreement.
How is a mortgage early repayment charge calculated?
When repaying a mortgage early, you will often be required to pay between 1% and 5% of what you still owe on your debt, depending on how far you are into your repayment schedule.
This may decrease with each successive year of the agreement. On a 5-year fixed rate deal, for example, you might be charged 5% for leaving in the first year, 4% in the second year, and so on.
So with a remaining mortgage of £300,000 and the same 5-year fixed rate deal, it would cost £15,000 to pay-off the debt in the first year, but switching in year 5 would charge just £3,000 by comparison.
What do I need to consider?
it can help to keep the following points in-mind if you’re thinking about paying off your mortgage early:
- If you are remortgaging your home, you may be able to spread the early repayment charge over the length of your new agreement
- It can be a good idea to make sure you have some savings in reserve if you choose to pay-off your mortgage, so that you still have a financial safety net for emergencies
- Flexible mortgages and offset mortgages allow you to overpay your mortgage and draw back the money if you need it – without applying early repayment charges.
Early car finance repayment charges
Can I repay my car finance early?
Most car finance providers will allow early repayment, but will typically apply a charge.
How is a car finance early repayment charge calculated?
Car finance early repayment charges generally work in a similar way to the charges for personal loans.
You will be required to pay one or two months’ interest, depending on the amount left on your repayment term, if you want to pay-off the finance early.
What do I need to consider?
When paying off car finance early, it can help to keep the following in-mind:
- If you’re planning to sell the car after paying-off the finance, watch out for negative equity—if the remaining amount is less than you’d receive for selling the car today, you might want to wait
Will early loan repayment save you money?
For personal loans and car finance, early repayment can be an effective way to save some expense if your loan has more than 12 months left of its term. For terms with under 12 months remaining, the amount you have left to pay back in interest might be less than the early repayment charge. In which case, you might find that you are better-off keeping the savings for other purposes.
In the case of fixed-rate mortgages, the fee you pay will be higher the earlier in the agreement you trigger it. In these cases, it can save you some money to wait a few years before repaying the loan or remortgaging.
How to avoid early repayment charges
Early repayment charges will be commonplace for most forms of borrowing, but the specific fees will vary between lenders.
In some cases, lenders might not apply an early repayment charge at all.
This is where we can help. As a broker, we search a wide variety of trusted lenders, providing you with a range of options to choose from. We’ll highlight options without early repayment charges, so you can weigh-up whether that benefit makes sense for your needs.
To get started, you can head to our loan eligibility checker to start comparing lenders today.
How does early repayment affect my credit score?
Repaying a loan on-time is a good sign that you are a reliable borrower and will help to improve your credit rating.
Similarly, having an open account with a strong repayment history has a positive impact on your credit score. By repaying your loan early, you may lose this when you close your account – especially if it’s your only credit repayment.
However, paying off your loan early and having less debt could be better for you personally. Ultimately, this is something you will need to decide for yourself, based on your circumstances and preferences.
Is early loan repayment worth it?
Whether early loan repayment is a good idea will depend on your financial situation and how much interest you have left to pay, as well as any repayment fees you may be required to pay.
If you still have many more years of interest left on the repayment schedule, the savings you’ll make by redeeming early might often be worth it. Whereas it may not be worth it if the fee for repaying early is greater than the amount of interest you have left to pay.
If your current loan has a very high interest rate, or you are trying to clear off multiple debts, it may also be worth considering a debt consolidation loan.
You may want to switch to a loan with a lower interest rate, combine monthly repayments into a single outgoing payment or, if you’re repaying a guarantor loan, repay it with a new loan that’s entirely in your name.
With any route, you’ll want to consider any early repayment charges to make sure they don’t outweigh the benefits.
Start comparing lenders and early repayment charges today
If you’re weighing-up your options before you borrow, then head to our personal loans eligibility checker to start comparing lenders and early repayment charges.