Early repayment charges and redemption fees

Should I pay off my loan early? Whether it is a good idea to pay off your loan before the end of its term depends on whether you're likely to be hit by early repayment charges and redemption fees for paying off your loan before the end of the loan term. There are pros and cons to paying off your loan early.

Is it a good idea to make an early repayment on my loan?

Paying off a loan early can save you money and make good financial sense. You may save on interest charges and free up money that you can use to pay off other debts, or build up rainy-day savings.

However, you should check whether the small print of your loan contract includes charges or repayment fees. Otherwise, it could be expensive when you make an early repayment of a loan.

Why might I need to pay redemption fees?

Where you take out a loan, it's for a set term. Personal loans are usually between one and three years, but may be longer. Mortgage, which are also loans, can be for very long periods. Written into the contract is the amount of interest you will pay over the term, and the monthly repayments you will make. These repayments may be part payment of the loan and partly interest.

Some loans allow you to pay off your loan early without any penalties or to overpay by a fixed amount. If this is the case then it's a good idea to make an early repayment on your loan if you can afford to do so.

You will save money on interest charges and you will also improve your credit rating because you will be able to show that you were able to borrow money responsibly and pay it back.

If you are thinking of taking out a loan, have a good look at the small print before you sign up. If you think you might want to pay a loan back early then look for personal loans that allow you to repay your loan before the end of the term. You will need to weigh up whether here is an added cost of having a flexible repayment loan with the advantage of being able to clear your debt early.

When is it not a good idea to pay off a loan early?

Some loan agreements have clauses in the small print that penalise early repayments with fees, such as early redemption fees and early repayment charges.

The small print differs between loans and between lenders, so the only way to tell whether you are likely to be hit by an early repayment charge is to check your loan agreement or get in contact with your lender and ask them.

You can compare loans with no early repayment charges or fees using our comparison tables and find the best loan for your needs.

The early repayment charge explained

Paying back a loan before the end of its term may seem like a great idea, but you need to be aware that a loan may have charges associated with paying off the balance early.

Comparing loans can bring up some confusing terms, such as 'early repayment charge' or that 'no early repayment penalties apply'. To make things even more complicated, different loans use different names for the same charge. Common terms to look out for include:

• Early repayment charge

• Early repayment penalty

• Early redemption fee

• Redemption charge

• Financial penalty

Have a look in the documents you were given when you took out the loan. These should explain whether there are any redemption fees or early repayment charges and how much they might cost.

How much will I have to pay if I repay my loan early?

Early repayment charges vary. With most loans, you are allowed to pay back your loan early, but it may not always be the best policy because you will be charged redemption fees.

It might be possible to repay some of your loan, increase your monthly repayments in order to shorten the term of your loan, or make partial repayments. Whether you can do this penalty-free depends on the terms that you signed when you originally took out the loan. You will find this in your loan documents.

How much will it cost me to pay off my loan early?

While there is no set amount, an early repayment charge is usually equivalent to one or two months’ interest. However, if you have a large loan this could rack up to several hundred pounds.

The earlier in the term you repay the loan, the higher the charge as the interest component of the loan repayment makes up a higher proportion of the repayment, the earlier in the loan term it is. So it may make sense to pay off a loan if it has been going for some time.

An early repayment charge can add a considerable cost to your loan so work out the figures carefully before going ahead, and ask for more information from your lender about potential charges. Your lender should make it clear how much it will cost you in total.

How can I avoid an early repayment charge?

If you think you will want to repay your loan before the end of its term, then you must look for more flexible loans and check which loans apply a charge and which allow early repayment.

Please do not forget if you move an existing loan into a debt consolidation loan, you will still be liable for an early repayment penalty.

I want to make an early repayment – what should I ask my lender?

When you get in contact with your lender you should ask for details on:

• How much of the loan is still outstanding?

• How much you have paid off?

• Are there any repayment fees or charges?

• Is there an early redemption penalty?

• Would it would be better to continue with the loan until the end of its term?

They should be able to provide you with this information. You can ask for it in writing so that you have a record of the early payment fees schedule and you know exactly how much it will cost you.

Compare early repayment loans with Uswitch

Compare loans with Uswitch, and you can select types of loans depending on your particular requirements. Your results will highlight which loans do not have an early repayment charge.

You should also consider other factors when choosing your loan, like the Annual Percentage Rate (APR) and your monthly repayment.

Do all the best loans have an early repayment charge?

Not necessarily. Some of the cheapest loans available won’t charge you a penny for early loan repayment, and we can help you find these flexible loans with our loans calculator.

I am struggling with my loan – what help is available?

Many lenders are aware that people may be struggling to keep up with repayments and may need help in paying their monthly premiums. 

If you're struggling with loan debt you can contact your lender and ask what help is available, or whether your interest might be frozen for a period while you get your finances back on track.

You can also get debt help by contacting a free debt counselling service from a debt charity who will give you impartial advice. You don't need to pay for debt advice as organisations like National Debtline will offer help for free.

Read more …

• Loans explained: all you need to know

• What are personal loans and which one is best for me?

• Unsecured Personal Loans Calculator and Comparisons