Can you pay off a personal loan early?

Whether you’re able to pay off your loan early (and how much this may cost you) will depend on the terms and conditions of your loan.

You can settle your Novuna Personal Finance loan at any point during your loan term. Log in to your account, use our app or call our Customer Experience team to get an early settlement figure.

Make unlimited free overpayments along the way, too. So if you’d prefer to pay your loan off faster, there are plenty of options available to help you manage your money.

In this guide, we’re going into more detail on how early settlement works to help you make a more informed decision.

How do I settle my loan early?

You can settle your loan early online via the Novuna app or by contacting our Customer Experience team on 0344 375 5500.

We’ll share your current settlement figure, telling you how much you need to pay to settle your loan in full. The settlement figure is based on the loan amount remaining, plus interest up until the point of the settlement date. Your 'settlement date' will be taken to be 28 days after the date you tell us you want to pay off your loan in full. If the duration of the agreement is longer than 12 months, we may defer the settlement date by a further calendar month.

Once you have your settlement figure, it’s then up to you whether you go ahead and make a settlement payment. You will have 28 days from the point at which you request a settlement figure to decide. If you choose not to settle your loan within this timeframe, you will continue making your monthly repayments and will have to request a new settlement figure again later down the line.

How do I make overpayments?

As with making an early repayment, you’ll be able to make extra payments (sometimes known as a partial early settlement) online, via our app or by calling our Customer Experience team.

It’s completely free to make overpayments. You won’t be charged any fees or additional interest. Simply tell us how much you want to repay, and we’ll do the rest.

If you overpay less than your usual monthly repayment figure, your next monthly repayment will automatically be reduced by the amount you overpaid.

If the amount you wish to overpay is higher than your regular monthly repayment, the extra amount will automatically be deducted from your outstanding balance and therefore your loan term will be reduced. Your monthly repayment will be unaltered, so you’ll continue to make your repayments as normal until your loan is settled.

Benefits of paying off personal loans early

You can reduce your debt-to-income ratio sooner

Your debt-to-income ratio is an important factor for lenders when assessing your affordability. They’ll look at what percentage of your income goes towards existing credit commitments to determine whether additional debt repayments may be affordable for you.

Reducing the amount of debt you have by repaying a loan could help to reduce your debt-to-income ratio. This, in turn, may help you to improve your chances of obtaining credit again in the future.

You could pay less interest in total

When you settle your loan early, you generally always pay back less interest than originally agreed in your credit agreement. So, if you come into some extra cash, you could use it to pay off your loan ahead of schedule.

Free up some cash each month

The money that would usually go towards repaying your loan each month could be put towards other things, such as paying off other debt or building your savings account. If it’s your goal to become debt-free, paying down your current debts could help you to work towards those aspirations.

Other things to consider when repaying a loan early

While there are undoubted benefits to paying off your loan sooner, you should ensure that settling your loan early (whether fully or partially) is the right decision for you.

Understand the cost

If your lender charges an early repayment fee, plus interest charges, you may decide that it’s not worth settling your loan early – particularly if you’re nearing the end of your loan term. Novuna Personal Finance won’t charge you any penalty fees for settling early, though we do ask you to pay up to 58 days of interest depending on how long is left on your term.

Deciding whether to settle your loan early is an entirely individual choice, but always work out how much it will cost you to settle versus how much interest you’ll save in the long run.

You should also pay close attention to your individual affordability. Paying off your debt in full (and potentially saving some money on interest) might seem like an attractive prospect. But ensure you can still afford everyday expenses and other credit commitments before parting with a large sum of money to settle a loan.

If you’ve had a financial windfall, you might wish to consider putting some cash into savings to use as an emergency fund too. Experts recommend having at least three months’ essential expenditure saved up. So, if you don’t have much money saved up but find yourself with surplus cash, think carefully about whether you choose to use it to pay off existing debt or whether you set it aside for a rainy day instead.

Prioritise your debt

If you are managing several different types of debt, you may choose to pay off any priority debts first followed by paying off high-interest debts to reduce the amount of interest you’ll pay in total. Once these key debts are paid off, you may wish to explore paying off your loan in full or making an overpayment. Seek guidance from a debt advice charity such as StepChange or contact Citizen’s Advice if you’re not sure how to create a plan of action to help you manage your debt.

Think about the impact on your credit score

It's also worth exploring the impact paying off a loan can have on your credit history. Making regular payments on time each month can have a positive impact on your payment history as you’ll be demonstrating you can reliably make payments on time.

Paying off the full amount in one chunk could reduce your opportunity to diversify your credit mix and showcase a track record of making repayments on time. This is unlikely to be a major issue but, depending on your current credit score and how important it is for you to build up your credit history, it’s certainly worth being aware of.

Learn about all things loans

Our Hints and Tips page is packed full of information on personal loans, from the difference between unsecured and secured loans to how much you’re able to borrow.

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Written by

Sophie Venner

Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business. In her spare time, you won’t find Sophie far from a notepad and pen as she squirrels away trying to write a novel.

Friday 3rd November 2023