How to reduce the cost of your personal loans

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 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, which don’t require anything (like your home) as security in case you can’t pay it back. These options aren't for reducing the cost of secured loans like mortgages.

Your loan provider must allow you to repay your personal loan early. But they might charge you an early repayment fee of around one to two months' interest.

Any early repayment fees must be set out in your loan agreement.

Most people can make full or partial early payments of up to £8,000 a year without being hit with penalty fees.

If there’s more than one year left on the loan agreement, the maximum penalty charge is capped at 1% of the amount being repaid early, over £8,000.

If you’re in the last year of the loan agreement, the penalty for repaying more than £8,000 is capped at 0.5%.

If you took out the loan between June 2005 and February 2011, the rules are slightly different. Overpayments on these loans are subject to penalties of no more than two months' interest. 

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, one offering a lower interest rate, a shorter deal, or both.

As you can see from the above example, if you go for a shorter-term loan your monthly repayment might go up. But you’ll cut your costs because the total amount of interest you pay will be lower and you’ll have paid off your loan earlier.

Make sure you can afford the higher monthly repayment before you switch. 

If you’re thinking about switching loans, make sure you compare a number of different options. The easiest way to compare loans is by checking the APR, but you also need to think about any other costs involved. 

If for any reason you aren’t satisfied with how lenders have dealt with your early repayment, you should complain. For example, if you think you’re being overcharged or treated unfairly.

It's usually a good idea to complain to your lender first. If you’re still not satisfied, you can take your complaint to the Financial Ombudsman Service if necessary. 

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

Consolidation loans are now much harder to get. It’s important to only consider taking one out when you’ve explored all your other options, especially if the loan is secured against your home.

While they can seem an attractive option because of lower interest rates and repayments, consolidation loans can often cost you a lot more than sticking with your current loans.

This is because they usually have a much longer repayment term than unsecured loans. You might also risk losing your home if the loan is secured and you can’t keep up with the repayments.

When you’re consolidating your debts, also try to avoid building up more debt elsewhere.

Are you disciplined about repaying what you borrow and have a good credit score? Then there are occasionally interest-free or low-interest balance transfer credit card deals which transfer money directly into your bank account.

These can then be used to repay overdrafts and loans.

However, these deals usually come with a fee. So you’ll need to work out whether doing this would be cost-effective for you.

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

Loan providers must allow you to pay back a personal loan in full, but this can come with an early repayment charge of around 1 to 2 months' interest. Any fees and how they are calculated should be set out in your loan information and agreement, so you know what to expect if you repay early.

By law, almost everyone who took out loans from February 2011 onwards can make partial or full early settlements of up to £8,000 per year before being hit with penalty fees.

If there's more than a year left on the loan agreement, once more than £8,000 has been paid off, the maximum penalty charge that can be levied is 1% of the amount being repaid early.

If that kind of overpayment is made in the final year of the credit agreement, the penalty cannot exceed 0.5%.

Anyone who took out a loan prior to the introduction of the Consumer Credit Directive is subject to slightly different rules.

Overpayments on loans made between June 2005 and February 2011 are subject to penalties of no more than two months' interest.

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

You must give them notice you’re making an overpayment and make the payment within 28 days. 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 having been received 28 days later and you'll be charged interest during this time.