Can I pay off a secured loan early?

The practice of paying off a loan before the end of the credit agreement that was made when the loan was taken out is referred to as an early repayment or early resettlement.

Whether it is possible to repay a portion or all of your loan before the end of your term depends on the agreement between you and your lender.

The type of loan you have taken out may also impact whether it is possible to make early repayments.

What is a secured loan?

Secured loans make it possible to borrow money against an owned asset, such as a property. For that reason, secured loans are also sometimes referred to as home loans or homeowner loans.

Secured loans are a popular choice for people who:

• Want to take out a higher value loan
• Are struggling to secure lender approval for a personal loan
• Are looking for a loan with a longer repayment term

With a secured loan, borrowers may be able to access funds that exceed £100,000 and have longer repayment terms than the typical seven year maximum limit that applies to personal loans.

What is a secured loan for business?

With a secured business loan, borrowers can access the finance they need to help their business reach its full potential. Loans are secured against business assets, such as premises or properties.

Many secured business loans are available to limited companies, LLPs, partnerships, and sole traders, which is why they are a common financial product within the commercial sector.

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Is it possible to settle a secured loan early?

Yes, it is likely to be possible to pay off a secured loan before the end of the agreed term. Additionally, lenders typically actively expect borrowers to pay off loans that are secured against property if they move house.

However, it is important to be aware of the fact that it may not be possible for you to make partial overpayments on secured homeowner loans. So, it is important to check whether your lender is open to early repayment.

How can I determine whether my loan qualifies for early repayment?

When you applied for your loan, you will have signed a credit agreement with your lender. This document will contain a selection of conditions, one of which is likely to be an early repayment clause which will set out whether your lender will allow you to pay off your loan balance in part or in full ahead of the previously agreed timeline.

Will I be charged for paying off a secured loan early?

The early repayment clause of your credit agreement will also clearly set out whether there are any associated charges or fees that will be incurred should you decide to resettle your loan early.

In most instances, you will be charged for resettling your secured loan before the end of your loan term. The precise costs that will be incurred at this point will vary from lender to lender. Commonly, however, fees are equal to the cost of between one and three months’ interest.

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Why do some lenders charge an early resettlement fee?

When loans are repaid before the end of the agreed term, the lender will not receive the amount of interest that was forecast. As such, some lenders have associated charges and fees that ensure they recoup at least a percentage of that lost interest.

It is good practice to ensure that you thoroughly review the early repayment conditions associated with any loan before agreeing to its terms. Our circumstances and financial health can fluctuate over time and avoiding being locked into a lengthy repayment agreement can provide you with an additional layer of financial freedom that will help you to adapt quickly if the need arises.

Are there benefits to paying off a property secured loan early?

In order to determine whether you will benefit directly from paying off your secured loan early, you need to take a close look at your personal circumstances. If you have available funds that you can use to reduce or clear your debts, that might initially seem like the most financially responsible thing to do. However sometimes first impressions can be misleading.

Early repayment benefits include:

• Becoming free from debt sooner than you otherwise would, which can help you to boost your savings or simply provide you with some extra disposable income each month.
• Paying less interest overall, which is an additional cost that can add up to a substantial sum over the course of a long-term loan.

There are also some early repayment disadvantages to consider, including:

• Associated charges and fees that may apply when making an early resettlement. It is good practice to see whether any savings in interest will offset these initial costs.
• Even loans that do not advertise early repayment costs may incur early resettlement interest charges if they are settled before the end of the agreed term.

How much money could I save by repaying a secured loan early?

The savings you could make are dependent on a few different factors, including:

• Loan size
• Time left on loan
• Interest rate

The settlement statement you will receive from your lender will contain all the information you need to understand how much money you could save, even when any applicable early repayment fees are accounted for.

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Should I repay my secured loan in full?

There are a variety of situations in which paying off a loan in full before its term ends could be a sound decision.

For example, if you have some savings and using this money will not affect your ability to meet your other financial obligations, clearing your debt will mean that you have one less monthly payment to worry about.

Consolidating your debts with a loan that offers a lower interest rate is another excellent reason to repay your current lender in full, as this has the potential to save you a lot of money in accrued interest costs over the course of your loan term.

Will repaying a secured loan early impact my credit score?

There is the chance that early loan repayment will have an impact on your credit score, at least in the short term.

Making consistent loan repayments demonstrates that you have a responsible attitude to debt management but when a loan is paid off, the account is closed and is no longer used as current evidence by lenders.

Conversely, you may also see your credit score increase over the longer term because when a debt is paid off in full, it is shown as ‘satisfied’ on all future credit reports.

Are there any alternatives to early resettlement?

If you decide that early resettlement doesn’t make financial sense, that doesn’t mean that you are stuck with your existing loan terms. You may be eligible to combine several loans into a single debt consolidation loan or switch your loan to one with more advantageous terms.

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How do I pay off a secured loan early?

If you want to pay off your secured loan before the end of your loan agreement, you must contact your lender to request an early settlement figure. Your lender should respond within seven days with a settlement statement which will detail:

• The amount of the loan you have already paid off
• The outstanding balance on your loan
• The cost of any penalty fees or repayment costs

You will then have 28 days to decide whether you want to go ahead with the early resettlement or to continue making regular monthly payments as usual. If you opt to wait, there is nothing preventing you from asking your lender to provide an amended settlement statement at any point in the future.

Is it possible to write off a secured loan?

As a secured loan is usually of a high value, lenders are only likely to consider writing it off in the most exceptional circumstances. It is important to contact your lender if you are finding it difficult to make repayments on a secured loan because there may be a number of steps they can take to ease your financial burden.

It is imperative to remember that as secured loans are intrinsically linked to an asset, failing to make regular repayments and defaulting will give your lender the right to repossess your home to recoup their losses.

What if my lender won’t permit early secured loan repayments?

If you are not satisfied with your lender’s approach to early settlements, contact the Financial Ombudsman Service [1] for help and advice.

Secured Loan Calculator

Before taking out a secured loan against property or a business secured loan, it is important to explore your options to ensure that you are selecting the right financial product for you and your needs.

Our secured loan comparison tool will allow you to look at a range of options from different lenders, which will help you to choose the best secured loan with flexible terms and conditions.

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References

• [1]www.financial-ombudsman.org.uk