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23 Feb 2019

Borrowers face early-repayment charges on half of all personal loans

Which? analysis finds the punitive charge is hard to avoid - but not impossible

Paying off a loan earlier than expected can lift a huge weight off your shoulders - but the majority of providers will hit you with a hefty fee for clearing your debt ahead of the agreed timeframe.

Which? analysis has found that 59% of personal loans currently available come with early-repayment charges (ERCs), a fee applied if you pay off your debts before the end of your deal.

We reveal the loan providers hitting customers with this charge and where to find a loan without ERCs if you want the option to pay off your debt sooner penalty-free.

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Which loan providers charge ERCs?

You may expect to find ERCs on long-term products like mortgages but they also apply to a majority ofunsecured personal loans.

Of the 73 personal loan products on the market, 43 came with early repayment charges, our analysis of Moneyfacts data found - meaning just 30 loan products don't charge a fee for early repayment.

A total of 28 different providers charge ERCs on their loan products. The good news is we found 20 providers that offered flexible loans with no early-payment penalties.

The table below reveals the firms that currently have a policy of charging ERCs and those that don't.

The cost of repaying a loan early

The Consumer Credit (Early Settlement) Regulations 2004set out the following rules:

  • If you have less than 12 months left on your plan, providers can charge up to 28 days' interest.
  • If you have more than a year to go,providers can add an extra 30 days or one calendar month.

So, depending on the policy of the company you take the loan with,you could be charged the equivalent to one or two month's interest.

The earlier in the term you choose to repay the loan, the higher the charge is likely to be.

This is because interest makes up a larger portion of your loan repayment in the early stages of your deal. If you try to clear your debt near the start of your deal, your bill could be quite hefty, though this might still not be as much as the total interest you'd have to pay by sticking to the repayment plan.

Best personal loans without ERCs

When you compare loans, make sure you take a closer look at the terms and conditions of the product before jumping in.

If there's a chance that you will be able to repay your loan before the end of its term, then you should consider a flexible loan.

While many of the cheapest personal loans come with ERCs, some of the best loans don't.

Here are the lowest rates available from flexible loan providers when borrowing £10,000 over five years.

Personal loanRepresentative APR Early Repayment Charge?
John Lewis Financial Services Personal Loan2.9%No
Zopa Personal Loan2.9%No
Nationwide Existing Member Personal Loan3%No
Post Office Money Personal Loan3.2%No
AA Member Loan3.2%No
Hitachi Personal Finance Personal Loan3.3%No
AA Personal Loan3.3%No

Source: Which? analysis of Moneyfacts data correct 20/02/2019

  • Find out more: the best personal loan deals - the best rates on the market as well as all the information you need to compare deals including whether a product has early repayment charges.

Why do early repayment charges apply?

When lenders offer you a loan, they budget for you to pay interest over the whole deal period.

On a £10,000 loan taken out over five years at 2.9%, a lender would expect to make £744.80 in interest - but some of this would be lost if the loan is cleared early.

Early repayment charges compensate lenders for this loss. On the flipside, the charges disincentivise people from clearing debts as soon as possible and keeping their interest minimal.

How to pay off your personal loan early

If you want to pay off your loan early, you should contact your lender to request an 'early settlement amount' for the loan.

Your lender will provide you with a figure that may or may not include ERCs depending on its policy and give you a period of 28 days to pay it.

You won't be under any obligation to pay if the charges are too high and can continue with the loan as planned.

If you just want to make an overpayment, you should again notify your lender. If ERCs apply to overpayments, the lender may send you details of the charge and give you 28 days to pay.

When making overpayments, your payment schedule for the rest of the loan will be adjusted.

This can either help you reduce your ongoing payments over the same term or reduce the term of the loan, depending on the lender's policy.