You have come into some money, a bonus, an inheritance, savings that have built up, or the old deposit that finally came back, and you are wondering whether to use it to pay off your personal loan early. The instinct is that paying off debt early must be a good thing. In most cases it is. But the answer depends on a specific calculation: does the interest saved by paying early exceed any settlement fee the lender charges? If the answer is yes, early repayment saves money. If the fee exceeds the remaining interest, which can happen near the end of a loan, it does not.
This guide covers your statutory right to repay early, the charge caps set by the Consumer Credit Act, how to calculate whether early repayment is worth it, the difference between partial overpayment and full settlement, and the process for closing the loan. All figures are illustrative. This article is for informational purposes and does not constitute financial advice.
At a Glance
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Early repayment charges are capped by law. The maximum is 1% of the amount repaid early, or 0.5% if 12 months or fewer remain on the loan.
These caps are set by the Consumer Credit Act 2006 (implementing the Consumer Credit Directive) and are statutory limits, not guidelines. The charge cannot exceed the total amount of interest that would have been payable over the remaining term. Many lenders charge less than the cap, and some charge nothing at all. The terms of the specific loan agreement state whether a charge applies. Checking with the lender before making the payment confirms the exact cost.
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The calculation is straightforward: interest saved minus the settlement fee equals the net saving. If the result is positive, early repayment saves money.
The interest saved is the total interest you would have paid over the remaining term if the loan ran to its natural end. The settlement fee is the early repayment charge (if any). If the interest saved is £400 and the settlement fee is £60, the net saving is £340. If the interest saved is £30 and the settlement fee is £40, early repayment costs £10 more than keeping the loan, which can happen in the final months of the term.
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You do not have to repay the full balance. Partial overpayments reduce the balance and the total interest without closing the loan.
If you have £2,000 available but the settlement figure is £5,000, a partial overpayment of £2,000 reduces the outstanding balance and the interest charged on it going forward. The monthly payment typically stays the same, but the loan is repaid sooner and the total interest paid over the remaining term is lower. Partial overpayments are subject to the same charge caps as full settlement.
Your right to repay early
Under the Consumer Credit Act, every borrower with a regulated consumer credit agreement has the right to repay part or all of the loan early at any time. The lender cannot refuse an early repayment or require the borrower to continue making payments for the full term. This right applies to all regulated personal loans regardless of the lender, the amount, or the remaining term.
The right to early repayment is unconditional. The borrower does not need to give a reason, does not need the lender’s permission, and does not need to wait for a specific point in the term. The only cost the lender can impose is the early repayment charge, which is capped by the limits described in the next section. The borrower must notify the lender in writing of the intention to repay early, and the lender must then provide a settlement figure showing the exact amount required to close the loan.
This right is separate from any specific terms in the loan agreement. Even if the agreement does not mention early repayment, the statutory right overrides. The guide to personal loans and your consumer rights covers the full set of statutory rights that apply to regulated consumer credit agreements.
What the law says about early repayment charges
The Consumer Credit Act sets out the maximum amount a lender can charge for early repayment. These caps are statutory limits and apply to all regulated consumer credit agreements.
| Remaining term at point of settlement | Maximum charge | Additional limit |
|---|---|---|
| More than 12 months remaining | 1% of the amount repaid early | The charge cannot exceed the total interest that would have been payable over the remaining term. |
| 12 months or fewer remaining | 0.5% of the amount repaid early | The charge cannot exceed the total interest that would have been payable over the remaining term. |
The third condition, that the charge cannot exceed the remaining interest, is important near the end of a loan term. If the outstanding balance is £3,000 and the remaining interest over the final four months would be £35, the early repayment charge is capped at £35, not £15 (which would be 0.5% of £3,000). This prevents the charge from exceeding the actual cost of the interest the lender is losing.
Many lenders charge less than the statutory maximum. Some charge a flat fee that is lower than the percentage cap. Others charge nothing at all and allow early repayment without any fee. The loan agreement states whether a charge applies and at what level. If the agreement is not clear, contacting the lender directly to ask what the early repayment charge would be on the current balance is the simplest way to confirm.
The calculation: does early repayment save money?
The calculation is the interest saved minus the settlement fee. If the result is positive, early repayment saves money. If it is negative, the fee exceeds the saving and early repayment costs more than running the loan to its natural end.
The following worked example illustrates the calculation for a loan with 18 months remaining. All figures are illustrative.
| Item | Amount |
|---|---|
| Outstanding balance | £6,000 |
| Remaining term | 18 months |
| Current APR | 7% |
| Total interest remaining if loan runs to term | Approximately £384 |
| Early repayment charge (1% of £6,000) | £60 |
| Interest saved (£384 minus £60) | £324 |
In this example, settling the loan early saves £324. The remaining interest of £384 is substantially higher than the £60 fee, so early repayment is clearly worthwhile. The saving is equivalent to more than five months of interest eliminated.
Now consider the same loan with only three months remaining. The outstanding balance might be approximately £1,050, the remaining interest approximately £12, and the early repayment charge (0.5% of £1,050) approximately £5. The net saving is £7. The saving is real but small enough that the administrative effort of arranging the early settlement may not feel worth it for three months of payments. Near the end of a loan, the remaining interest is often too small for early repayment to produce a meaningful benefit.
The early repayment saving calculator runs this calculation for any remaining balance, rate, and term, showing the net saving or net cost before a decision is made.
Partial overpayment vs full settlement
Early repayment does not have to be all or nothing. A partial overpayment reduces the outstanding balance without closing the loan. Full settlement clears the balance entirely and closes the account. Both are covered by the same statutory right and the same charge caps.
A partial overpayment is useful when the borrower has some money available but not enough to settle the loan in full. If the outstanding balance is £8,000 and the borrower has £3,000 available, a partial overpayment of £3,000 reduces the balance to £5,000. The monthly payment typically stays the same (unless the borrower requests a reduced payment from the lender), but the loan is repaid sooner because each subsequent payment reduces a smaller balance. The total interest paid over the remaining term is lower because interest is calculated on the outstanding balance, which is now £5,000 rather than £8,000.
The early repayment charge on a partial overpayment is calculated on the amount overpaid, not on the full outstanding balance. A partial overpayment of £3,000 with more than 12 months remaining attracts a maximum charge of £30 (1% of £3,000), not £80 (1% of £8,000). This makes partial overpayments proportionate even on modest amounts.
The process: how to settle a personal loan early
The process for early settlement is standardised by the Consumer Credit Act and follows the same steps regardless of the lender.
Settling a personal loan early
Contact the lender (by phone, online banking, or in writing) and request an early settlement figure. This is the exact amount needed to clear the loan today, including any accrued interest and the early repayment charge. The lender is required to provide this within seven working days of the request.
The settlement figure is valid for 28 days from the date it is issued. If the payment is not made within this period, a new figure will need to be requested, as interest continues to accrue daily. The figure will be slightly higher each day, so paying sooner within the 28-day window is marginally cheaper.
Pay the settlement figure in full using the method specified by the lender. This is usually a bank transfer, though some lenders accept payment by debit card. Ensure the payment reference matches the loan account number so it is allocated correctly. If using the funds from a new loan (refinancing), the new lender may pay the settlement directly.
After the payment is received and processed, request written confirmation from the lender that the loan is fully settled and the account is closed. Cancel any direct debit associated with the loan to prevent further payments being collected. The settled account will appear on the credit file as “settled” with the full payment history preserved.
The entire process typically takes one to two weeks from requesting the settlement figure to receiving confirmation of closure. If the loan is being refinanced (replaced by a new loan at a lower rate), the guide to switching or refinancing a personal loan covers the additional steps involved in coordinating the old and new loans.
How early repayment affects your credit file
Settling a personal loan early creates two changes on the credit file, and both are worth understanding before making the decision.
The first is that the account is marked as “settled.” This is a positive outcome. A settled account with a full history of on-time payments is a strong feature on a credit file. It shows that the borrower took on a commitment and met it. The payment history up to the point of settlement is preserved and remains visible on the file for six years after the account is closed. Early settlement is not flagged as anything unusual or negative.
The second is that the account is no longer active. Closing the loan removes it from the “active accounts” section of the credit file, which can temporarily reduce the diversity of the credit mix. Credit scoring models consider the variety of active credit types (credit cards, loans, mortgage) as a factor, and losing one category can produce a small, temporary dip in the score. This effect is minor and typically resolves within a few months, particularly if the borrower has other active credit accounts.
For most borrowers, the interest saving from early repayment far outweighs any temporary credit score effect. The exception might be a borrower who is planning a major credit application (a mortgage, for example) within the next few months and whose credit mix is already limited. In that specific scenario, the timing of the early settlement relative to the mortgage application is worth considering. The guide to how personal loans affect your credit score explains how settled accounts appear on the file and how scoring models weight different factors.
When early repayment is not worth it
Early repayment saves money in most situations, but there are a few specific scenarios where it does not, or where the saving is too small to justify the effort.
If the loan is within its final three to four months, the remaining interest is often small enough that the early repayment charge (even at 0.5%) is close to or exceeds the interest saving. The net benefit may be a few pounds or even negative. In these cases, running the loan to its natural end costs the same or less than settling early.
If the money earmarked for early repayment is needed as an emergency fund, using it to clear a low-rate personal loan may leave the borrower without a financial buffer. If an unexpected expense then arises, the borrower may need to borrow again, potentially at a higher rate than the loan that was repaid. Maintaining a modest emergency fund (£500 to £1,000) before directing surplus cash toward loan repayment is a practical sequence for most borrowers.
If the loan rate is very low (below 3% to 4% APR) and the money could be placed in a savings account or investment earning a higher return, the mathematical case for early repayment is weaker. The borrower is effectively paying less to borrow the money than they would earn by keeping it invested. This calculation is more relevant for larger balances and longer remaining terms. For most personal loan balances and mainstream rates, the interest saved by early repayment exceeds what could be earned in a savings account.
Related tools
Enter your remaining balance, rate, and term to see the net saving or net cost of settling early after the charge is deducted.
If you are settling to refinance at a lower rate, this tool shows the net saving after the settlement fee and the new loan cost.
Model the monthly payment and total cost of a replacement loan if you are considering refinancing.
Looking for more loan resources?
Guides and tools covering secured loans, debt consolidation, and home improvementsFrequently asked questions
How do I find out the early repayment charge on my loan?
The loan agreement states whether an early repayment charge applies and at what level. If the agreement is not to hand or the terms are unclear, contacting the lender directly (by phone or through online banking) and asking for the early settlement figure will produce the exact amount, including any charge. The lender is required to provide this figure within seven working days of the request.
Some lenders display the settlement figure within the online banking or app interface, updated daily, which avoids the need to contact the lender at all. If the lender does charge a fee, it will be itemised within the settlement figure so the borrower can see the breakdown of outstanding balance, accrued interest, and early repayment charge.
Can I make a partial overpayment without settling the whole loan?
Yes. The right to repay early under the Consumer Credit Act covers both full settlement and partial overpayment. A partial overpayment reduces the outstanding balance and the interest charged on it going forward. The early repayment charge, if applicable, is calculated on the amount overpaid, not on the total outstanding balance. A partial overpayment of £2,000 on a loan with more than 12 months remaining attracts a maximum charge of £20 (1% of £2,000).
After a partial overpayment, the lender typically has two options: keep the monthly payment the same and reduce the term (so the loan finishes sooner), or reduce the monthly payment and keep the term the same. Keeping the payment the same and reducing the term saves more in total interest, because the balance is cleared faster. Asking the lender which approach is applied by default, and requesting the alternative if preferred, is a practical step when making the overpayment.
Will settling my loan early affect my credit score?
Settling a loan early is recorded as a positive event on the credit file. The account is marked as “settled” and the full payment history (all on-time payments up to the point of settlement) is preserved. There is no negative marker for early settlement. The account record remains visible on the file for six years after closure.
The only potential effect is a temporary, minor reduction in the credit score if the loan was the only active instalment account on the file. Closing it reduces the diversity of the active credit mix, which some scoring models factor into the score. This effect is small and typically resolves within a few months as other account activity continues. For most borrowers, the interest saving from early settlement far outweighs any temporary score fluctuation.
What happens if I overpay but then need the money back?
Once a payment is made to the lender, it cannot be recalled. Overpayments and settlement payments are permanent reductions in the loan balance. If the borrower needs money after making an overpayment, they would need to borrow again, either by taking a new loan, using a credit card, or drawing on an overdraft. This is why maintaining an emergency fund before directing surplus cash toward loan repayment is a practical consideration.
If the loan allows redraw (where overpayments can be withdrawn back), this would be stated in the loan agreement. Redraw facilities are uncommon on UK personal loans. The standard position is that once money is paid to the lender, it reduces the balance and cannot be retrieved.
Is it better to overpay my loan or save the money?
In most cases, overpaying a personal loan produces a better return than saving the equivalent amount, because personal loan interest rates are typically higher than savings account interest rates. If the loan charges 7% APR and the best available savings rate is 4%, every pound used to reduce the loan balance saves more than every pound placed in savings. The exception is if the borrower has no emergency fund at all: building a modest emergency buffer (£500 to £1,000) before directing surplus cash to the loan is a practical sequence, because an unexpected expense without savings could lead to higher-cost borrowing.
For borrowers with very low-rate loans (below 3% to 4% APR), the comparison is closer, and placing the money in a competitive savings account or investment may produce a slightly better mathematical return. However, the certainty of reducing debt (a guaranteed saving) versus the variability of investment returns (not guaranteed) is a factor that many borrowers weigh in favour of overpayment even when the rates are close.
Squaring Up
The right to repay a personal loan early is statutory. The charge is capped at 1% of the amount repaid early (or 0.5% in the final year), and many lenders charge less or nothing. The calculation is simple: interest saved minus the settlement fee equals the net saving. For loans with more than a few months remaining, early repayment almost always saves money. For loans in their final months, the remaining interest may be too small for the saving to be meaningful. Partial overpayments are a flexible alternative that reduce the balance and the total interest without closing the loan, and they are subject to the same charge caps.
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Everything in one place, across secured loans, debt consolidation, and home improvementsThis article is for informational purposes only and does not constitute financial advice. Early repayment charge caps are set by the Consumer Credit Act and are stated accurately. All other figures, rates, and worked examples are illustrative and do not represent any specific lender. Whether early repayment is appropriate depends on the specific terms of the loan, the remaining balance and term, and the borrower’s wider financial position. Missed repayments on any loan can affect your credit rating and may result in further action.
