Paying off a personal loan early: what you save

The short answer: yes, you have a legal right to repay a personal loan early, in full or in part. You save the interest on what you repay, minus a small charge: at most 28 days' interest plus 1% of the amount repaid (0.5% if under a year is left), and the 1% only applies if you repay over £8,000 in 12 months. On an £8,000 loan at 9% APR over 3 years, settling on day one would save about £978.

The loan in this example

£8,000 at 9% APR over 36 months costs £253 a month and £1,111 in interest in total. Here is what different early repayments save.

A lump sum now

Extra each month

These figures ignore any early repayment charge. Below £8,000 repaid in a year, there is usually none beyond a few weeks' interest.

Why the saving is smaller than you might expect

Interest is charged on the falling balance, so most of it is paid in the early months. Halfway through a loan, well over half the interest is already behind you. Paying off early still helps, but the saving shrinks the later you do it.

The early repayment charge, exactly

• Loans since 1 February 2011: up to 1% of the amount repaid if more than 12 months are left, 0.5% if 12 months or less. Only on fixed-rate loans, and only if you repay over £8,000 early in any 12 months. It can never be more than the interest you would have paid.
• Up to 28 days' interest: lenders may set the settlement date 28 days after your request, so you pay roughly four weeks' interest. On £8,000 at 9% that is about £53.
• Older loans can have different terms, sometimes up to 58 days' interest.
• Car finance (HP and PCP) follows the same settlement rules. See car loan vs car finance.

How to do it

1. Ask the lender for a settlement figure (full) or tell them you want to make a partial repayment.
2. For a partial repayment, say whether you want a shorter term or lower payments. A shorter term saves more.
3. Pay within the period on the statement, usually 28 days.
4. Check you receive confirmation the account is settled, and cancel any direct debit.

Before you do

• Keep an emergency fund. Clearing a loan then needing a credit card defeats the purpose. See how much emergency fund you need.
• Pay off dearer debt first. Credit cards usually charge far more. See which debt to pay off first.
• Compare with savings rates. At 9% APR, the loan beats almost any savings account.

Thinking of combining several debts instead? See debt consolidation loans.

Partial or full settlement?

You don't have to clear the whole loan. A partial early repayment of any size reduces the balance, and you can choose a shorter term or lower payments. If you are near the £8,000 threshold where the 1% charge can apply, splitting a larger repayment across two 12-month periods can keep you under it.

Should you use your savings?

At 9% APR the loan costs more than savings earn after tax, so clearing it with spare savings usually makes sense. Keep enough cash for emergencies first, because you can't take back money you have used to repay a loan, and borrowing again could cost more.

Does it help your mortgage application?

Often, yes. Lenders count loan payments as a monthly cost, so clearing a loan before you apply for a mortgage can increase how much you can borrow by much more than the balance you repay. Make sure the account shows as settled on your credit file before you apply; it can take a month or two to update.

Figures assume a fixed rate and monthly payments. Rules are for regulated consumer credit in the UK. This is general information, not financial advice.