Repaying a Loan Early - Everything You Need to Know

If you’re in the process of repaying a loan, you might have some questions, such as:

• Can I repay my loan early?
• Could I save money by paying off a loan early?
• Will I be charged a fee for repaying my loan early?

In our guide, Little Loans provides some information that you might find useful.

Is it a good idea to repay a loan early?

If you’re in a position to do so, you may consider paying off your loan early.
As we’ll discuss in more detail further down the page, you could be charged a fee for repaying your loan early.
You shouldn’t make an early repayment if doing so will leave you struggling with money and unable to cover the cost of your essential outgoings, such as housing, bills, and food.
It’s important to understand exactly what and how much you could be charged. Take the time to do the maths and work out how this could affect you financially.

Could I save money by repaying my loan early?

You could save money by repaying your loan early, although there are some important considerations to bear in mind before you decide whether this is right for you.
While repaying a loan early could save you money on interest, it’s important to be aware that some lenders could charge an early repayment fee. You should make sure that the money you’ll save on interest by making an early repayment is more than the early repayment fee.

Will I be charged a fee to repay my loan early?

You could be, but this will depend on your lender. If your lender charges an early repayment fee, it should be made clear in your credit agreement, which will have been sent to you when you accepted the loan.

Why do lenders charge early repayment fees?

Interest is the cost of borrowing money. When you take out a loan, interest will be included in your monthly repayments. If you repay your loan early, you’ll pay less interest. As a result, the lender may charge an early repayment fee.

How much does it cost to repay a loan early?

This will depend on whether your lender charges an early repayment fee, and if they do, how much you’ll need to pay.
In line with Consumer Credit Regulations 2004, lenders are within their rights to charge up to two months’ worth of additional interest for an early repayment. This reduces to up to one month’s worth if you have less than 12 months left of your repayment term.

Will repaying a loan early improve my credit score?

In an ideal world, paying off a loan early would have a positive impact on your credit score; however, surprisingly, that’s not quite the case.
Repaying your loan early could actually cause a minor, temporary decline in your credit score.
This is because repaying your loan on time each month proves that you’re responsible with credit. Without this active evidence, your credit score could drop.

A drop in your credit score could be temporary, so try not to worry too much. It’s good to be aware of the possible impact, though, especially if you’re expecting to make another credit application soon.

Requesting an early settlement

If you’re considering repaying your loan early, you’ll need to contact your lender and request an early settlement amount. This is the amount you’ll be required to repay if you choose to go ahead and clear the balance of your loan early. The figure will be based on how much of the loan you’ve already repaid, the length of time left on your repayment term, and the early repayment fee, if applicable.

Again, it’s important to weigh up whether the money you’ll save on interest by repaying early will be more than any fee.

Once you’ve received your early settlement amount, you’ll have 28 days to decide whether you’d like to go ahead and repay your loan early. After 28 days, the figure will be invalid, and you’ll need to make a new request if you’d like the information again.

Things to think about before paying off a loan early

Possible advantages to repaying a loan early:

• You could save money on interest.
• Clearing your debt could offer financial freedom: without your loan repayments, you could have more money month-to-month.

Things to think about before you repay your loan early:

• Depending on your lender, you could be charged an early repayment fee.
• Your credit score may drop, but this may only be temporary.

Can I repay a loan early with Little Loans?

Little Loans is a credit broker, not a direct lender. If you’re matched with and accepted by a lender, your loan will be provided by the lender, not by Little Loans.

You can find out whether your lender accepts early repayments and whether they charge a fee for this by reading your credit agreement. Your lender will be able to advise you if you’re unsure.

Where can I get money advice?

If you’re worried about money or debt, you can reach out to any of the following organisations for free, impartial advice: StepChange, MoneyHelper, Citizens Advice, and National Debtline.