How to Pay Off a Loan Early: The Savings, the Charges and What to Consider

You've come into some money — maybe a bonus, an inheritance, savings you've finally built up — and you're wondering whether to clear that personal loan early. Will it save money? Will the lender charge you for the privilege? Is there a clever way to do it?

Good questions. Paying off a loan early is usually a great financial move, but the maths varies, and there are a few things worth knowing before you transfer that lump sum.

Can you pay off a personal loan early?

Yes. You have a legal right under the UK Consumer Credit Act to repay any personal loan early — either in full or partially — at any time during the term. The lender cannot refuse.

What they can do is charge a small fee (an Early Repayment Charge, or ERC) to compensate for the interest they'd otherwise have earned. But the law caps these charges, so the fee is almost always small relative to the interest you save by paying off early.

This applies to standard UK personal loans of up to £25,000. Larger loans, mortgages and some specialist products have different rules — particularly mortgages, where ERCs can be substantial during a fixed deal.

Early repayment charges explained

For consumer loans up to £25,000, UK rules cap ERCs at:

• One month's interest for loans where there's less than 12 months remaining
• Up to two months' interest for loans where there's more than 12 months remaining

So on a typical personal loan, the ERC is usually equivalent to one or two months of interest payments. On a £10,000 loan at 8% APR with five years remaining, the ERC might be around £130-£150.

By contrast, paying that loan off five years early would save thousands in interest. The ERC is a small fee for a much larger saving.

Some loans (often the better-rated ones) have no ERC at all. The lender absorbs the cost as part of the product's attractiveness. Always check your loan agreement to see exactly what applies.

How to find out your ERC

Three places to look:

1. Your original loan agreement. The ERC terms are listed in the "Right to repay early" section.
2. Your online account. Many lenders show the current settlement figure (which includes any ERC) when you log in.
3. Direct from the lender. Call or message them and ask for a settlement figure. They have seven working days to provide one.

The settlement figure is the exact amount you'd need to pay today to clear the loan completely. It includes the outstanding balance, any accrued interest to date, the relevant ERC, and a deduction for the interest you'd save by paying early. Usually it's valid for 28 days.

When paying early saves money

Almost always, paying off a personal loan early saves money. The savings come from interest you no longer have to pay on the remaining balance over the remaining term.

Even after the ERC, you'll usually be ahead. A worked example:

• £10,000 loan, 8% APR, 5 years remaining
• Total interest if kept to term: ~£2,200
• ERC for early settlement: ~£135
• Net saving: ~£2,065

Use our loan repayment calculator to see your specific scenario. The longer you have left to run, and the higher the rate, the bigger the saving from paying off early.

When the charges make it not worth it

There are a few situations where early repayment might not be the best move:

• Very small remaining balance with low interest. If you've got £500 left at 4% APR, the savings are marginal — maybe £20 over the remaining term.
• You'd raid emergency savings. If clearing the loan leaves you with no buffer for unexpected expenses, you might end up borrowing again later at higher rates. Keep some emergency money first.
• Higher-rate debts elsewhere. If you've got a credit card at 24% APR alongside a 7% loan, clearing the card first saves more.
• You can invest at higher rates. Rare for most UK savers, but if you can reliably earn more on an investment than your loan rate (after tax), keeping the loan and investing the cash is the higher-return move.

For most borrowers in most situations, early repayment is the right answer. But these exceptions exist.

How to make overpayments

You don't have to clear the whole loan at once. Partial overpayments are usually allowed and can produce big savings while preserving cash for other things.

How to make an overpayment:

1. Log into your loan account or call the lender
2. Specify the amount you want to overpay
3. Choose whether you want the overpayment to reduce your monthly payment (term stays the same) or reduce the term (monthly payment stays the same)
4. Make the payment
5. Confirm the new balance and revised schedule

For maximum saving, the "reduce the term" option is usually better. Lower monthly payments feel nice but extending the term doesn't save you total interest — keeping the payment the same on a shorter term does.

Some lenders allow overpayments without any ERC up to a certain percentage per year (commonly 10% of the balance). Larger overpayments may trigger the standard ERC.

Partial overpayment vs full settlement

The choice depends on what you have available:

• Full settlement clears the loan entirely and stops interest accruing. It's the cleanest option if you can afford the full settlement figure.
• Partial overpayment reduces the balance and the interest you'll pay going forward, without using all your cash. Good if you have some spare cash but not enough to clear the whole loan.
• Regular increased payments add a small amount above the minimum each month. The total saving over time can be significant, and it's easier than finding a big lump sum.

You don't have to pick one. Many borrowers do a combination — a partial overpayment when they have spare cash, plus a slightly increased monthly payment ongoing.

How to get a settlement figure

If you want to clear the loan in full:

1. Contact your lender — usually via online account, app, phone or email
2. Request a "settlement figure"
3. The lender will respond within 7 working days (often within 24 hours)
4. The figure usually shows: outstanding balance, accrued interest, ERC, interest deduction for early settlement, total to pay
5. The figure is typically valid for 28 days
6. Pay the exact amount within that window
7. The lender will confirm the loan is closed and update your credit file

Don't just transfer the outstanding balance figure you see on your account dashboard — that's usually the principal balance, not the actual settlement figure with interest and ERC. Always request the official settlement amount.

The effect on your credit score

Settling a loan early usually has a small positive effect on your score in the short term:

• Your overall debt is reduced
• The account moves to "settled" status, which is positive
• Removes one active commitment from your file

Longer term, there's a very small downside: the closed loan account will eventually drop off your file after six years, slightly reducing your average account age. But this effect is small and usually outweighed by the immediate benefits.

If you're planning a major credit application soon (a mortgage, say), settling smaller debts can improve your affordability picture — even if it dips your score by a couple of points in the short term.

What to do with the money you save

Paying off the loan frees up cash flow. The monthly payment you were making is now yours to redirect. A few good uses:

• Build an emergency fund. Three to six months of essential expenses in an easy-access savings account.
• Pay down other debt. If you have credit card balances or other loans, redirect the freed payment to clear them faster.
• Save toward a goal. A house deposit, a car, a holiday. Our savings goal calculator can help.
• Increase pension contributions. The combination of tax relief and long-term compounding makes this one of the highest-return moves available.
• Invest in an ISA. Over the long term, stocks and shares ISAs have historically beaten cash savings, with tax-free growth.

The trick is to actually redirect the money to something useful, rather than letting it absorb into general spending. The discipline that helped you pay off the loan is the same discipline that lets you put the savings to work.

Frequently asked questions