Can you repay a loan early?

Q Generally, can you repay loans early? For example, if I take out a bank loan with 48 monthly repayments, but after 24 months my financial position has improved, could I pay off the remaining balance without incurring the cost of interest for the final 24 months?

DN

A Generally, unsecured personal loans can be repaid early. This is because the interest payable on the loan is calculated over the original term and you don't have to pay interest for the period during which you didn't actually owe any capital.

So, for example, if you borrow ?2,000 over a year, the interest is calculated over 12 months. If after six months you find you can repay the outstanding capital, the lender should provide a settlement figure which reflects the fact that you only had the loan for six months rather than 12.

You may have to pay an early redemption penalty, though (just like with mortgages) of around two months' interest.

However, if your loan is longer-term - say five to 10 years - you may find that the settlement figure is far higher than you were expecting. This is because with longer-term loans, repayments are mostly used to pay off the interest in the early years (again, just like a mortgage), leaving the bulk of the capital to be repaid in the later years.

Make sure you check the lender's policy on this before signing up to the loan!