ABC FinanceSecured loansCan You Repay A Secured Loan Early?

Can I Repay My Secured Loan Early?

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Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in secured loans

If you have taken out a secured loan, it’s important that you understand whether you can pay it off early.  Circumstances change and you may find your financial situation improves midway through a loan term.

Paying off a secured loan early will theoretically save you money, as you can reduce the amount of interest paid. However, be aware that most lenders will insert an early exit fee into your loan agreement to protect their return.

Can I pay off a secured loan early?

Yes, you can usually pay off a secured loan early.

If you have arranged your funding through a secured loan broker, you will be made aware of the terms and conditions of the lending. In most cases, you will be entitled to repay a loan early, albeit accruing fees in the process.

If a lender is unwilling to allow early repayment of a secured loan, think carefully about whether you are comfortable entering the agreement. Secured loan repayment terms can be lengthy – they often run for 10, 15, or even 20 years. That is a long time to be locked into an agreement if you are capable of closing your balance earlier.

In practice, secured loans can be repaid early in almost every case – it’s simply a case of how much early repayment charge, if any, you must pay.

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Why would I want to repay a secured loan early?

There are three compelling reasons to pay off a secured loan early. The first of these is arguably the most important – you will release the share in your property’s equity held by the lender.

The risk of securing a loan against property is obvious; if you find yourself unable to make repayments, you risk losing your home. Nobody knows what the future holds, so if you can free yourself of this obligation, the idea will be appealing. What’s more, while you are still making repayments on a secured loan, your options related to an asset are limited.

Imagine that your property is valued at £250,000, and you owe £75,000 to your mortgage lender and £40,000 to a secured loan lender. If you want to sell your property, you will not be able to port the loan to a new credit agreement secured against a different property without permission – and you will struggle to find a mortgage lender willing to work with you if this debt comes as part of the deal. In reality, you will need to use your equity to repay the loan, meaning you walk away with less money in your pocket from the sale.

Share of equity upon sale with secured loan

Now, imagine that your financial circumstances change and you are able to repay the loan early. In doing so, you will be free to sell your home and move at leisure, without any loss of equity. This will put you in a much stronger position when looking for a new property.

Share of equity upon sale

The second reason is that paying off a loan will improve your credit rating. While it’s true that making regular direct debit payments on a credit agreement will reflect well on your creditworthiness as it shows reliability, a substantial sum of debt can also drag your score down. By repaying the loan in full, you may see quite a spike in your score after a month or two.

Finally, we have what may be the most appealing explanation of all – repaying a secured loan can potentially save you money in the longer term. Just do not expect to walk away without incurring any expenses at all.

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Do you get charged for repaying a secured loan early?

Almost all lenders of secured loans will apply an early exit penalty fee to closing a balance before the end of the agreed term. In an ideal world, you would repay the balance remaining on a secured loan and close an account without further expenses. Unfortunately, this is unlikely to be the case in the early years of the loan.

This exit fee is designed to recoup some of the interest your lender will miss out on if close your account early.

All the same, the cost applied to an early exit will vary between lenders. Some will charge a percentage of the outstanding balance, while others limit the fee to a month or two of interest payments. Discuss the ramifications of an early exit fee with your broker when taking out the loan and factor these into your decision-making.

Will I save money if I repay a secured loan early?

Despite the impact of early exit fees, repaying a secured loan early can still save you money in the longer term. You will cut down on the eventual cost by not accruing interest payments for the entire term.

Let’s imagine you took out a loan for £40,000 at an interest rate of 4.5% over 15 years. The numbers would break down as follows upon agreeing to the loan.

Payment TermLoan RepaymentInterestTotal Repayable
180 months£222.22 per month£81.94 per month£304.16 per month

If you allow this loan to run its course, you will eventually repay £54,748.80, so the loan will cost you £14,7483.80 in total.

Now, imagine that you are 7 years into your loan and are in a position to repay it early, and your lender levies an early exit fee of 5% of the total outstanding balance. After 84 consecutive loan repayments, you will have paid £18,666.48 from your loan (disregarding interest), leaving an outstanding balance of £21,333.52.

This means that, should you choose to pay off the balance and the 5% early exit fee, you will be liable to pay £22,400.20 to close your account, on top of the £25,549.44 you have already paid (£6,882.96 of which was interest.)

That comes to £47,949.64, so the loan has cost you £7,949.64 in total. The numbers do not lie – even with an early exit fee, paying off a secured loan in half the length of the full term can halve the amount it will eventually cost you.

Keep reading – How Long Does A Secured Loan Take To Complete?

How to pay off a secured loan early

If you want to repay your secured loan early, contact your lender and ask for a settlement figure. This will be the final amount that you need to pay to close the account.

Once you have this figure and are confident that you have the financial resources to make payment, arrange for a one-off transaction to clear the balance. Once this goes through, you will be wholly clear of obligations to your lender and can move on without carrying this debt.

How to make an overpayment on a secured loan

An alternative to paying off a secured loan early is to make an overpayment. As the name suggests, this involves repaying more than your contracted contribution.

You could pay a lump sum towards your loan agreement or increase your monthly repayments. Overpayments can reduce the length of your loan, reducing the interest you will eventually pay, but may still accrue fees.

Overpayments may be appealing if you cannot afford to clear the entire balance of a loan but would like to reduce the current balance. If you are in a position to pay £10,000 off an outstanding sum of £20,000, you will theoretically halve the length of time left on your agreement.

Like an early exit, overpayments on a secured loan need to be arranged with your lender. Do not just change your direct debit or make a bank transfer without discussing things. Talk your plans over with your broker, as a professional will be able to find the best way to make overpayments while minimising the financial penalties.

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