Written by: Andy Townsend
Head of Marketplace Distribution, Consumer
20th January 2022
When you enter into an unsecured loan, you agree to pay back the money over a set period, typically with monthly payments. But you do have the option to make an early loan repayment.
This guide will cover all the important information you need to know before paying off a loan early.
Whether paying a loan off early will save you money or not is down to several factors: your financial situation, your loan term (i.e. how long your loan is for), your loan’s interest rate, and whether you are liable for early repayment charges.
The more time you have left on your loan, the higher your repayment charges may be. If you have less than 12 months left on a monthly repayment plan, lenders can charge up to 28 days’ interest as an early repayment fee. If you have more than 12 months left of your loan term, lenders can add an extra 30 days (or one calendar month) to this. 1
If your loan is for more than £8000, there may also be additional fees which can vary based on the length of your payment plan. It’s important to make sure you take time to read your loan agreement and terms and conditions carefully for further details on any associated fees
However, you may still be able to save money by paying off a loan early — even if it has more than a year left. For instance, if your current interest rate is particularly high, paying back early could save you money by paying less interest overall. To help you to consider your options, it’s always worth speaking to your lender directly to see how much you’d owe with normal repayments or if you paid off your loan early.
There are other reasons why someone may want to pay off a loan early, apart from saving money. Whether this is the right thing to do will depend on your circumstances.
Many people set reducing or clearing current debts as a financial goal, so they will inevitably consider paying off a loan early if they have the funds to do so. For example, some people who come into money (e.g. receive an inheritance) may pay off an outstanding loan to become debt-free or reduce the amount they owe.
Whatever your reason for paying off a loan early, you need to be aware of early repayment charges and always review your credit agreement. Speak to your lender to get a clear idea of what it could cost you.
An early repayment charge is a fee you may be charged if you pay off your loan prematurely.
The early repayment fee amount will vary depending on the type of loan and the lender you use. It is usually calculated based on how much interest you would have paid on the money borrowed in a set period minus any allowable rebate.
It can seem confusing that you have to pay an extra charge for paying back early, but it’s because providers agree to lend based on interest rates that are calculated according to the full period.
Before you pay back your loan early, you should check what your early repayment charge will be.
At Shawbrook, you have the right to repay all or part of your outstanding balance at any time. If you decide to make an extra payment, we’ll reduce your loan period to reflect this. If you want to pay back in full, you may have to pay back up to 58 days’ interest on your outstanding balance on top of the principal amount you have borrowed. Simply get in touch with us and we’ll let you know how making early payments will impact what you owe.
Whichever option you choose, you will generally pay back less interest than if you had let the agreement run its entire course. And this will be made clear once you receive a settlement figure if you choose to pay back your loan early in full.
We suggest placing this in bold so the reader can quickly find the section relevant to Shawbrook.
A settlement figure is the outstanding loan amount (the money you still owe) plus any interest and charges (including the early repayment charge).
A lender will calculate your settlement figure based on the Consumer Credit (Early Settlement) Regulations 2004. Typically, a lender will add up your remaining monthly instalments and deduct an amount to account for future interest that you’ll no longer need to pay. They’ll also take into account any charges or outstanding arrears on your agreement and will add this to your settlement figure.
When you receive a settlement figure, there will also be details around the settlement's date and how long this figure is valid.
With Shawbrook, settlement figures are valid for 30 days from the date you request one. While the calculations are complex, the settlement figure you will have to pay will include no more than 58 days’ worth of interest calculated on the balance outstanding at the time provided.
Remember that requesting a settlement figure doesn’t mean you have to pay back your loan early. You can use this figure to decide whether it’s worth paying the early repayment charge and settling the debt.
Paying off a loan early may affect your credit score. Many people assume that it will instantly improve their score, but that’s not the case.
Some scoring models see regular repayments as a positive thing. This means that paying a loan regularly can help increase your credit score over time. If you pay off your loan early, you may find it harder to build credit and increase your score.
You may also see your score dip if you close a credit account. While paying off an outstanding balance won't damage your credit score, closing an account may cause your score to decrease temporarily. This is because closing a credit account can increase your credit utilisation ratio. Your credit utilisation ratio is the amount you owe divided by your credit limit. So, if you have an overall credit limit of £2,000 and use £1,000, your credit utilisation is 50%. However, if you cancel a card with a £500 credit limit, your limit is reduced to £1,500. So, your utilisation would jump up to 75% even if you were spending the same.
To avoid this, you may want to consider leaving a credit card or store card account open after you've paid off your balance in full. That being said, closing a credit account may be the right thing if you want to limit the amount of credit you can use.
If you want to pay off your Shawbrook loan in full or pay off part of your loan early, please call us on the numbers below.
Once we’ve got back to you with a settlement figure, you can decide whether you still want to go ahead with paying off your loan early.
Some websites may offer an early loan repayment calculator, but these are not always accurate. That’s why we recommend getting in touch with your lender for a precise settlement figure.
You can find more information about Shawbrook’s policy on our personal loans page.
If you have taken out a loan with us before 13th December 2021, please use the below contact details.
Opening hours (Exc. Bank Holidays) are:
Monday - Thursday: 8am – 8pm
Friday: 8am – 6pm
Saturday: 9am – 2pm
Please call 0345 650 6290
If you have taken out a loan with us on or after 13th December 2021, please use the below contact details.
Opening hours are:
Monday - Thursday: 8am – 8pm
Friday: 8am – 6pm
Please call 0333 003 0260
We’re closed at the weekend and on public holidays.
You can also log in to your customer portal to contact us: https://myloan.shawbrook.co.uk/