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If you’ve taken out a loan and are ready to pay it back, some lenders will allow you to repay your debt early without extra fees. Repaying your debts early is a great way to guarantee that you won’t fall behind on payments and end up paying more than you need. It allows you to pay back the money you owe and feel confident that you won’t incur late fees or added interest. However, most lenders will charge fees for repaying a payday loan or other form of personal loan early. 

You should always check with your lender when you borrow money online or in store, whether or not they will charge you early repayment fees for paying your debt off early and if so, how much the fees are. In some cases it may be possible to repay your loan early and even with the early repayment fees, save money on interest, compared to what you may have otherwise paid over a longer period.

What Are Early Repayment Charges?

Early repayment charges, sometimes called ‘ERCs,’ are extra fees charged if you decide to pay off a loan before the end of the agreed term, no matter what you have used your payday loan for. The majority of personal loans and mortgages will have early repayment fees. How much you will have to pay will depend on your loan agreement.

It is worth remembering that the interest you are charged on a payday loan or other form of short term loan is what is known as ‘compounded interest,’ which means that you are charged interest on the outstanding amount of the loan; including any interest already accrued. This means that over time, you will be charged ‘interest on your interest’ as well as on the loan amount.

This means in practice that you may for example borrow $500, but when the interest is added up and more interest is compounded on this, you could pay hundreds of dollars more in interest on top of your loan amount until the balance is cleared.

How Much Does It Cost To Repay A Loan Early?

Repaying your loan before the end can help you save money on interest, but keep in mind the added cost of early repayment charges. To find out if early repayment charges apply to your loan, check the documents you were given when you took out your loan. Here, your lender will have stated whether there’s an early repayment fee and how much it would cost you. 

Even if early repayment fees apply to your loan, you may be able to make partial overpayments free of charge. For example, a lender may stipulate that you can make overpayments up to £8,000 on your unsecured loan within 12 months, free of charge. Early repayment terms vary depending on the type of loan and your lender’s terms, so be sure to check the agreement you signed with the lender.

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Paying off a loan early can help you get back to enjoying the things you love

How To Pay Off A Loan Early

If you are considering paying off your loan early, you’ll need to find out exactly how much it will cost. To do this, you’ll have to ask your lender for an early settlement amount. This will lay out all the information you need to know about repaying early, specific to your loan. It will show you:

  • How much of the loan you have already repaid
  • How much you still owe
  • The interest charges applied to your loan
  • Any early repayment charges 

You can use your early settlement amount to decide whether you want to go ahead with early repayment. Depending on your financial circumstances, you may decide that, given the fee, it is not worth it. You’ll have to decide within 28 days of receiving the early settlement amount; after that point, you’ll need to get it recalculated. 

Can I Save Money By Paying Off My Loan Early?

Paying off your loan early could save you money. This will depend on:

  1. How much interest you pay
  2. How long is left on your loan
  3. Your financial circumstances

To determine whether paying off a loan early is a good idea for you, be sure to consider the early repayment fee. To find out more, read our guide: Can I Repay A Payday Loan Early?

Paying Off A Loan To Reduce The Interest 

If you’re paying an extremely high interest rate on your current loan, it is usually worth paying it off early, despite ERCs. It may also be worth taking out a debt consolidation loan to pay it off, even if you have to pay an early repayment charge. Ultimately, if you can reduce what you owe in the form of loan debt and interest, paying off a loan early may be a good move to help you get back to where you were, prior to needing the loan in the first place.

Loan Term

If you have a short time left on your loan term, it may not be worth paying early. For example, if the charge for paying your loan off is two months’ worth of interest, but you have less than a year of interest left to pay, you may decide to stick to your current plan. However, if you still have many more years of interest ahead, it is likely worth the huge savings, despite the early repayment fee. 

Financial Circumstances

If repaying early would cause financial pressure, it may not be the right decision. In particular, if you have a low-interest loan, it is not worth paying back your loan early if it leaves you in a precarious financial situation.