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How to reduce the cost of your personal loans

You might be surprised by how much you could save on the cost of your loan by moving it or repaying early – even if there are extra charges for doing so. We take a look at your potential options below for unsecured loans and provide tools to help you compare costs.

Repay loans with savings

It almost always makes sense to repay any outstanding loans using your savings – just make sure the early repayment charges aren’t too high. And if you have savings to use, always pay off your most expensive loan debts first.

Below are some different options for reducing the overall cost of your loans even if you can’t repay them in full yet. The options are best for reducing the cost of unsecured loans. These are loans that don’t require something as security in case you cannot pay a loan back.

Switching to a low-interest loan or shorter deal

If you don’t have savings, you might be able to pay off your loan in full and more cheaply with another loan – for example where you can get a lower interest rate, a shorter deal, or both.

Example 1 – How much you could save by switching to a cheaper interest rate

Amount owed £5,000
Length of time to pay off loan 3 years
Cost of paying off loan with interest rate of 15% £1,239.76
Cost of paying off loan with interest rate of 10% £808.09
Saving by switching to loan with cheaper interest rate £431.67*

Example 2 – How much you could save if you reduce the term or length of the loan

Amount owed £5,000
Interest rate 8%
Current length of loan 5 years
Monthly repayment £101
Cost of interest over the loan’s lifetime £1,083
New length of loan 3 years
Monthly repayment £157
Cost of interest over the loan’s lifetime £640
Saving by switching to a shorter loan £442*

*Remember to check set-up costs for the new loan when working out your figures. These will be included in the APR.

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As you can see from the above example, if you go for a shorter term your monthly repayment might go up, but you’ll save even more in interest and pay back your loan early.

Just be sure you can afford a higher repayment before you switch.

If there are set-up costs for the new loan, they should be included in the APR, but make sure you take them into account.

The amount you can be charged on early repayment is capped by law – but there might be additional charges if you repay more than £8,000 in a 12-month period.

Use our Loan calculator to see how much you could save by switching to a loan with a low APR.
Use our Budget calculator to see if you can afford higher repayments.

If you have a complaint about an early repayment charge

If for any reason you aren’t satisfied with how lenders have dealt with your early repayment – for example if you think you’re being overcharged or treated unfairly, you should complain. You’ll need to complain to your lender first and then, if you’re still not satisfied, you can take your complaint to the Financial Ombudsman Service if necessary. Read more in our guide below.

Find out how to sort out a money problem or make a complaint.

Should you consolidate your debts?

Did you know

If you have an unsecured loan taken out after 1 February 2011, you can pay off your loan in full without early repayment fees, so long as it’s not over £8,000. There are also no extra charges if you pay off a variable rate loan early.

Some loans are specifically advertised as debt consolidation loans – these allow you to merge your loans into one.

Consolidation loans are now much harder to obtain and should only be considered once you have explored all your other options as they are usually secured against your home.

While they can seem an attractive option because of lower interest rates and repayments, they can often cost you a lot more in the longer term than sticking with your current loans and you risk losing your home if you cannot keep up the repayments.

It is easy to consolidate your debts and then go and build up more debt elsewhere, so be careful and budget thoroughly.

You have to know how you’re going to repay before you consolidate – and then stick to your repayment plan.

If you need help with your debts, contact a free debt advice agency.

Find out more about Debt consolidation loans.

Paying off loans with credit cards

Beware fees!

If you do consolidate your loans, be aware of any fees and charges that come with the new loan – and of any exit fees if the unsecured loan you are repaying is more than £8,000 or if you took it out before 1 February 2011. There are no fees on early repayments on variable rate loans.

If you’re disciplined at repaying and have a good credit score, there are occasionally interest-free or low-interest balance transfer credit card deals which transfer money directly into your bank account.

This can then be used to repay overdrafts and loans.

However these deals – sometimes known as ‘super balance transfers’ – come with a fee, so you’ll need to work out whether doing this would be cost effective for you.

Make sure that you’ll be able to pay off the debt before the zero or low interest rate runs out and that you ask your personal loan provider how much it’ll cost to pay off the debt in full.

Read more about super balance transfers on MoneySavingExpert.

Paying off your loan early with extra payments

If you can’t repay an unsecured personal loan in full you should be allowed to make extra payments to help pay off the loan sooner and so reduce the overall cost.

With unsecured loans taken out after 1 February 2011, you can make extra payments of up to £8,000 in a 12-month period without penalty.

For extra payments over £8,000 in a calendar year, the maximum penalty is 1% on the entire amount repaid.

For example, if you paid back £9,000 – £1,000 over the limit – the most you could be charged would be £90.

If the loan is the final year of the agreement, the maximum penalty is 0.5% of the entire amount repaid.

Make sure you tell your lender first

However, unless the lender specifically allows it in the contract, you can’t simply overpay without warning.

You must give them notice that you’re making an overpayment. Then you need to make the overpayment within 28 days of that notice, although you can send the payment with the notice if you prefer.

If you do send payment without notice, the lender can treat the payment as received 28 days later (so you’ll pay interest up to that point).

For unsecured loans taken out before 1 February 2011, and many secured loans, you usually aren’t allowed to make partial overpayments.

But you can repay in full at any time (and in part if that is allowed under the contract).

Always check the terms and conditions to see what exclusions apply to overpayments.

Claim back payment protection insurance (PPI)

Many lenders have been selling payment protection insurance premiums alongside loans and credit cards. You may not have been aware of it or be able to make a claim on it.

It might easily have cost you hundreds of pounds and if this policy was mis-sold you’re entitled to your money back.

To find out how you could get your money back, read our guide below.

This article is provided by the Money Advice Service.

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