Can you pay off a loan early?

Paying off a loan early means clearing some or all of your balance before the end of the agreed term. This can free up monthly funds sooner and reduce the amount of interest you pay. 

Most loans allow you to repay early, either through a full settlement or by increasing your monthly repayments. However, if you settle your loan early, you might have to pay an early repayment fee, depending on your lender and the terms of your arrangement. To be sure it's the right choice for you, it's important to balance these potential expenses with the savings they offer. 

How to pay off a loan early

There are two main ways to reduce or clear your loan balance ahead of schedule—full settlement or partial overpayments. Here is how each option works and what to watch out for. 

1. Request a settlement figure  

Before making any early repayment, you’ll need an official settlement figure from your lender. This isn't just the current balance showing on your account, but a calculated amount that can include:

• The remaining capital you owe
• Any interest rebates you are entitled to (money you get back for paying early)
• Any early settlement fees or interest charges applied by the lender

Settlement figures are usually time-limited, so once you have your quote, check the expiry date to avoid having to request a new one.

2. Choose your method of repayment

• Lump sum settlement: A full early settlement involves paying off the balance of your loan in one payment. Once the payment is received and processed, the loan is closed, and no further repayments are due.
• Overpayments: Partial repayments allow you to pay extra on top of your regular monthly amount. These additional payments reduce your outstanding balance and can either shorten the loan term or lower future monthly repayments, depending on the lender and your preference.

Do you have to pay any fees?

Some loans may charge an early repayment fee. These charges vary depending on the lender, the type of loan and the terms set out in your loan agreement. 

Before paying off your loan early, it’s important to check whether any fees apply and how they are calculated. 

How early repayment charges work

While paying off a loan early typically saves you money in the long run, lenders can charge a fee to cover the costs of ending the agreement ahead of schedule. 

The exact amount you pay depends on: 

• The amount you repay: The interest charge is applied to the balance you are clearing, not your original loan amount
• The interest rate: The charge is calculated using your loan's fixed interest rate
• The timing: Because the charge is based on interest, the cost typically lowers as your balance decreases over time

Important: Even with this charge, paying off your loan early could cost less in the long run. By clearing the debt sooner, you avoid paying interest on the remaining months or years of the agreement, and that savings can be larger than the fee. 

The pros and cons of early loan repayment

Paying off a loan early can reduce the total cost of borrowing, depending on the loan terms. To help you decide, it’s worth weighing up the advantages and disadvantages of early loan repayment.

Pros

• Reduce interest costs
• Free up your monthly income
• Have fewer regular repayments to manage
• Become debt-free sooner

Cons

• Early repayment charges may apply
• You may have less cash available if savings are used
• Removing an active credit account could impact your credit score

What are the alternatives to paying off my loan early?

Instead of settling a loan early, you may want to consider other options, such as:

• Refinancing to a different loan with a lower interest rate or better terms
• Adjusting your monthly repayments if your lender allows it
• Making occasional overpayments to help reduce your balance faster
• Using savings for other financial priorities 

Paying off your AA personal loan early

You can settle your AA Loan at any time, whether you want to clear the entire balance with a Full Early Settlement or reduce what you owe through a Partial Early Settlement. This flexibility allows you to make extra payments whenever you like, with no limits on the frequency or the amount you choose to pay. When you settle early, you’re typically entitled to an interest rebate, though the final calculation is based on a settlement date 58 days after, so you may be charged interest for that period. 

If you decide to make a partial payment, you can choose whether to lower your future monthly repayments or shorten the remaining term of your loan. If you don't specify a preference, we’ll automatically shorten the term to help you clear the debt sooner.  

To get started, simply call 0808 502 2414 to request a settlement quote, which remains valid for 28 days. 

FAQs

Is it a good idea to repay your personal loan early? 

Repaying a personal loan early can reduce the total interest you pay, which may lower the overall cost of borrowing. It can also reduce your outstanding debt, which may support your broader financial circumstances. 

Before repaying your loan early, check whether your lender charges an Early Settlement fee (also called an Early Repayment Charge). If the fee is higher than the interest you’d save, continuing with the agreed term may be more cost-effective. 

Can you pay a loan off early to avoid interest? 

Yes, paying off a loan early can reduce or stop future interest, as interest is charged on the remaining balance. Some lenders apply an Early Repayment Charge, which can affect how much you save. To understand the exact cost, you can request a settlement figure from your lender. This shows how much you’d need to pay to clean the loan and whether early repayment offers a financial benefit.  

Do all lenders charge the same fees for paying off your loan early? 

No, early repayment fees vary by lender and loan agreement. In some cases, fees are capped, often at around one or two months’ interest, but this depends on the provider and the terms of your loan. Always check your agreement to understand what applies to your specific loan. 

Will paying off a loan early hurt my credit score? 

Paying off a loan early can sometimes result in a slight change in your credit score. This is because closing the account reduces the number of active credit accounts on your file, and you’ll no longer be showing ongoing monthly repayments on that loan. In practice, any impact is usually minor, and some people may see little or no change. And, in some cases, reducing your overall debt can be viewed positively. 

While it’s something to be aware of if you’re planning a major credit application, such as a mortgage, in the near future, paying off a loan early can also reduce the amount of interest you pay and leave you debt-free sooner. 

Can I pay off a loan with a credit card? 

Some lenders allow loan repayments using a credit card, but many do not. Even where it’s possible, using a credit card to repay a loan can increase costs if the card has a higher interest rate or charges fees. Balance transfer fees and cash advance charges may also apply. It’s important to compare the costs before using a credit card to clear a loan. It’s also worth considering that credit cards often carry higher interest rates than personal loans.