Can you pay off loans early or late – or take a payment holiday?

Loans can be useful if you’re able to pay them off, but sometimes you may find that you need some extra time to repay a debt. Conversely, you may discover that you’re able to pay them off earlier than expected, and would like to clear as much of the debt as possible. Is it possible to pay off a loan early or late?

Paying off a loan early

This sounds easy in theory. If you’re able and willing to pay off a loan early, surely the lender would be happy to receive the payment, right? The answer, in reality, isn’t as straightforward. You may have to pay an interest charge on an early repayment, unless your credit agreement states that you’re exempt from this.

There is some regulation that protects your right to pay off a loan early. If the type of loan in question is covered by the Consumer Credit Act, you’re entitled to a statutory rebate of interest and charges that you’ve already paid. You’ll have to write to the lender and ask them for an early settlement amount, which is the amount that you’ll have to pay to clear the debt early.

You can also pay off part of a loan by asking the lender for a partial early settlement amount. The terms for how you repay the rest of the loan may already have been outlined in your credit agreement beforehand (in the event of an early partial payment). If not, you may be able to negotiate it with the lender.

Falling behind on payments

If you’re late on loan repayments, the lender has to send you an arrears notice as well as a Financial Conduct Authority (FCA) information sheet. The latter gives you an overview of your rights, and offers information on where to get help and advice.

The lender is also obliged to send you a default notice outlining what they require you to do in order to make repayments. If they want to impose charges (for example, penalties for late repayments), they’ll also have to notify you that they’ll be doing so. If you need independent debt advice, you can get in touch with organisations like the Citizens Advice Bureau.

Taking a break from repayments

Some lenders may let you take a ‘payment holiday’, which is essentially a break from making a repayment for a loan – for example, on a mortgage. However, you may have to undergo checks – for example, on your employment status, income, and so on. Payment holidays may also have an impact on your credit report, as they’ll show that you haven’t been paying off a debt regularly.

When it comes to loans, your actions can have consequences. Whether you want to pay a debt off early or late – or to take a break – you may want to consider your agreements with your lender first. If you’re planning on applying for a loan, it’s a good time to check what you may be allowed to do in terms of payment periods.