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Repaying Your Loan Early

Advice on paying off loans early.

Author: Jody Aird

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This can sometimes be a minefield however here are some guidelines that all lenders must adhere to.

If you have an agreement that is regulated by the Consumer Credit Act 1974, you can repay your loan early at any time. If your agreement is “regulated”, it will be shown clearly on the front page of your agreement.

If you took your loan out after 31st May 2005, the lender should have provided you details about repaying/settling. This can be provided either before signing on an information sheet, or incorporated into your credit agreement.

They will have either based it on your loan amount or on examples, either £100 or £1000 and at three stages, a quarter, a half and three quarters of the way through your loan.

If you want to repay your loan early you will need to contact your lender and they will let you know how much you will need to repay either over the phone or some may request you put it in writing, by law if you ask for settlement figure in writing they must respond in with a written settlement quotation in 7 working days.

It will show the amount you owe on your account, the amount to repay to settle the account, the date to pay it by (if this date is exceeded the settlement quotation will be invalid) and any “rebate” you are entitled to.

If any “rebate” is due the lender will apply a formula set out in the governing rules set out in the Consumer credit Regulations 2004 called “early settlement”. The rebate reduces the total amount of interest you would have paid if the loan had run its course.

The biggest presumption with a loan with fixed interest is that the interest is spread evenly over the instalments however this is not the case.

Example

Loan amount = £200 payable over 2 months instalment, you will pay the first month’s interest on £200 and in the second month you will only pay it on £100.

Therefore you would have paid two thirds of interest in the first month and only one third in the second month.

The rebate calculation is worked out on the number of instalments you have made, the number you have left to pay, the amount of interest charged month by month.

The lender is allowed to add interest for up to 30 days if the original length of loan was more than 1 year.

However

If you have been in arrears/missed payments at any time during your agreement this will affect your settlement amount. The lender may add extra interest to your account for the time you where behind in your payments.

Also if your loan was intended to be run over a number of years and you choose to settle early in to it the amount you have repaid in the first few months may not be enough to cover your lenders costs and interest for those few months. Therefore the amount you have to repay may be more than the original amount borrowed.

About Author

Freelance Journalist for Creditplus. For more advise on vehicle finance and loans please go to: http://www.creditplus.co.uk/blog/

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