If you come into money and want to clear your personal loan early, you have the legal right to do so — but you may face an early repayment charge. Understanding how ERCs work, how much they cost, and whether overpaying still makes financial sense is straightforward once you know the rules.
What the Law Says
Under the Consumer Credit Act 1974 (as amended), you have the legal right to repay any regulated personal loan early at any time. Lenders cannot prevent this. However, they can charge an early settlement fee — capped by FCA rules.
ERC cap rules:
- If there are less than 12 months remaining on the loan: maximum ERC = 1 month’s interest
- If there are 12 months or more remaining: maximum ERC = 2 months’ interest
These are maximum caps — your lender may charge less, or nothing at all.
How to Calculate the ERC
If your loan has more than 12 months remaining, the maximum ERC = 2 months of interest on the remaining balance.
Example:
- Remaining balance: £8,000
- Interest rate: 7% APR
- Monthly interest on £8,000: approximately £8,000 × (7% ÷ 12) = £46.67/month
- Maximum ERC: £46.67 × 2 = £93.34
That’s a very small amount. In this case, overpaying almost always makes financial sense.
Worked Example — Is It Worth It?
Scenario: Tom has £6,000 remaining on a personal loan at 9% APR with 30 months left.
Monthly interest on £6,000: approximately £45 Maximum ERC (2 months): approximately £90 Remaining interest over 30 months (estimated): approximately £730
Decision: The ERC of £90 saves approximately £640 in future interest. Paying early saves Tom £640 net. Strongly worth it in this case.
The maths changes if rates are very low or the loan is nearly paid off — but the ERC cap is low enough that early repayment is beneficial in most real-world scenarios.
How to Request Early Settlement
- Contact your lender (phone or online account)
- Request an early settlement figure — they must provide this within 7 working days under the CCA
- The figure = remaining capital balance − future interest rebate + ERC
- Pay the settlement figure by the date specified (it typically has a validity window of 28 days)
- Confirm in writing that the account is closed — get written confirmation
Lenders That Waive ERCs
Many lenders now offer penalty-free early repayment as a feature. If you know you may want to overpay, prioritise no-ERC loans when comparing. This information must be disclosed in the pre-contract information document (the SECCI) before you sign.
Overpayment vs Full Early Repayment
If you cannot fully clear the loan but want to pay extra:
- Partial overpayment reduces the capital balance faster
- Some lenders apply this by shortening the term (same monthly payment, fewer months)
- Others reduce the monthly payment (same term, smaller payments)
- Ask the lender which method they use — shortening the term saves more interest
For help comparing loan options with and without ERCs, see the Personal Loans and Borrowing Hub.
Does Paying Off a Loan Early Affect Your Credit Score?
Paying off a personal loan early generally has a neutral to positive long-term effect on your credit score. In the short term, closing an account reduces your overall available credit and lowers the average age of your credit accounts — which can cause a small temporary dip. Over time, clearing debt reduces your debt-to-income ratio and demonstrates responsible financial management.
If you are planning to apply for a mortgage soon, discuss timing with a mortgage broker. Some lenders view recently cleared debts positively; others focus on current debt levels. There is no universal rule, but paying off debt before a mortgage application is rarely a disadvantage.
Comparison — Pay Off Early vs Run to Term
| Repay early | Run to term | |
|---|---|---|
| Total interest paid | Lower (save future interest minus ERC) | Higher |
| Monthly cash flow | Freed up after settlement | Payment continues |
| ERC cost | 1–2 months’ interest (capped) | None |
| Credit score short term | Small temporary dip possible | No change |
| Best for | Extra cash available, high interest rate loan | Loan at very low rate where savings minimal |
What If You Can’t Fully Repay Early?
If a full early settlement is not possible, partial overpayments are worth exploring:
- Ask your lender whether overpayments are allowed (most regulated loans permit this)
- Confirm whether the overpayment shortens the term or reduces the monthly payment
- Shortening the term saves more interest — this is the better outcome
- Some lenders apply overpayments to upcoming months rather than reducing the capital balance — this is less effective; ask specifically for “capital reduction”
Even overpaying by £50–£100/month on a 7% APR loan over 3 years can save a meaningful amount. Run the maths using the lender’s settlement figure tool or a loan calculator.