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Consumer Rights.

Updated: 4 Mar 2021

I want to cancel a loan I've taken out, what do I need to know?

We explain what you need to know if you want to cancel a contract early, including the importance of cooling-off periods, so it doesn't end up costing you.
Which?Editorial team

Penalties for cancelling a contract

Contracts can be written or verbal, but it's always best to get a written contract if you can. And read the small print carefully before signing a contract – it could save you a lot of money and hassle later.

Once you've entered into a contract, they are, by definition, legally binding, and normally it can be difficult to cancel without financial penalty.

But, under certain circumstances, you are given the right to cancel over a specific period of time. This is referred to as your 'cooling off' period and the duration of this period depends on what you bought and the manner in which you bought it. 

Find out how to cancel a contract without being penalised.

Cooling off periods

Under the Consumer Credit Act you have 14 days to withdraw from a credit or loan agreement. The legislation applies to all credit agreements, whether made in person, on the internet or over the phone.

Your right to withdraw from a loan agreement is extended to all agreements falling within the Directive, as well as hire purchase agreements, pawn broking agreements, and business loans below £25,000. The right to withdraw doesn't apply to loans above £60,260.

If you think the loan provider has done something wrong, you can refer your complaint to the Financial Ombudsman Service.

Notice to cancel a contract

Notice of withdrawal can be given in writing or verbally, but you will have to repay the capital and interest accrued between taking out the loan and repayment.

The 14 day cooling-off period runs from the day the agreement is concluded or if later, from when you receive a copy of the agreement or, notification of the credit limit on a credit card.

While you can withdraw from the credit agreement, the contract for the item or service itself won't be affected. 

So if you use credit to finance the purchase of a car, for example, you can withdraw from the credit agreement but you would still need to pay for the car because you have entered into a contract with the car dealer to purchase a car. 

Cancelling a contract signed off premises 

You also have rights under the Consumer Credit Act 1974 to cancel your loan or credit agreement if the credit agreement was signed away from the creditor’s normal business premises. For example, if you sign the contract at your home, your place of work or at an exhibition stand in a shopping centre. 

In such cases you have a cooling off period of five days, which begins from the time you receive the second copy of the agreement (containing the cancellation form). 

Early settlement 

If you want to pay off a loan early, the Consumer Credit Act details that you should get a rebate of any interest and any charges you've paid. 

To do this, write to the lender and ask them to give you an early settlement amount for the loan. This is the total amount you must pay to clear the loan in full, including any rebate. 

The lender is obliged to tell you the amount in full, and allow you 28 days from when they received your request to pay off the request in full. The interest is dependable on when you took out the loan and how much you took out. 

Partial early settlement

If you want to pay off part of the loan early, you can ask for a partial early settlement. The amount of rebate you get will be less than if you paid off the loan in full. 

If you choose to pay off part of your loan, this will affect how you pay the rest of the loan. 

The credit agreement may be clear about how this will affect your remaining loan instalments. If not, you can negotiate with your lender about whether you reduce the regular instalments, or pay the rest of the amount owed over a shorter period of time.