Paying off a loan early - when can you pay off a loan early? | SavvyWoman

Paying off a loan early – check the paperwork as you may be able to make extra payments

Font size


If you’ve taken out a loan since February 1st 2011 you can make overpayments of up to £8,000 a year without having to pay a big penalty. That means if you paid a little extra every month, you could clear the loan earlier and save on interest payments. However, if you have an older loan, you may be charged a penalty if you make any extra payments. How do the rules work?

Paying off a loan early – loans taken out before 1st February 2011

The rules changed on 1st February 2011, so if you have a personal loan that you took out before then, you may be able to make extra payments but it’s not guaranteed.

  • Many loans let you pay them off in full (although you may have to pay a ‘penalty’ linked to the interest you would have paid if you’d let the loan run its full term.
  • Some loans let you make extra fixed monthly payments.

SAVVY TIP: Check the paperwork, if you still have the original document, or ask the bank/lender what the rules say about overpayments. Get any information in writing.

Loans taken out on or after 1st February 2011

If you’ve taken out a loan on or after 1st February 2011, you can make overpayments without a penalty of more than 1% of the amount repaid as long as you:

  • Limit the amount you overpay. Don’t pay off more than £8,000 in a 12 month period.
  • Tell the lender. Give the lender notice that you are going to make an overpayment.
  • Make the payment within 28 days of giving them notice.

SAVVY TIP: If you have to pay a penalty, it can be no more than 1% of the amount you’ve paid off early.

How to make an overpayment

This – hopefully – isn’t stating the obvious as there are certain rules around how you should make the overpayment.

  • Contact your lender. Normally this will just involve sending an email or writing a letter, but make sure you keep a copy of any letter you send or send it by registered post. If you phone your bank, keep a note of the date and time of the phone call.
  • Make the payment within the 28 day deadline.

SAVVY TIP: If you make an overpayment without contacting the lender first, it may mean that the lender will just reduce the term of the loan, but won’t necessarily reduce the amount of interest you have to pay.

  • Be aware of the £8,000 limit. Some lenders may let you overpay more than £8,000 without you having to pay a penalty. However, unless you’re sure of this, make sure you don’t overpay more than £8,000 in a year.

Other rights you have since February 2011

The new consumer laws gave borrowers extra rights around cancelling the loan agreement.

  • You can cancel the credit agreement within 14 days. You’re able to cancel the agreement within 14 days of having signed it, or within 14 days of receiving the loan/credit documentation if that’s later.

SAVVY TIP: You won’t have to pay any penalty for cancelling the loan or credit agreement but you will have to pay interest for every day that you borrowed the money.

  • You can ask for a statement about how much you owe. If you have a fixed term loan you’ll be able to find out how much you owe and how long the loan has left to run.

SAVVY TIP: You’re able to do this whenever you want as long as it’s not more frequently than once a month.

Related articles:

VIDEO: How to pay off your debts quickly

10 things you need to know about your credit rating

Are you affected by financial abuse? What to do if your partner is controlling about money

SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.