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, even if they are early repayment charges.

And if you do have savings to use, make sure you pay off your most expensive loan debts first.

Should you save or pay off loans and credit cards?

Read on to find out about the different options for reducing the cost of unsecured loans (which are not secured against your home or other assets).

Switching to another loan

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 the interest rate is lower or you can repay it quicker, so reducing the amount you pay overall.

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*

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

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

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

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

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

Also check whether the interest rate is fixed or variable (meaning it could go up).

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.

  • Use our Budget calculator to see if you can afford higher repayments.
  • Use our Loan calculator to see how much you could save by switching to a lower interest rate.

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?

If you have an unsecured loan taken out after 1 February 2011, you can pay off your loan in full without any extra charges, 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 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 and you risk losing your home if you cannot keep up the repayments.

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

Find out more about Debt consolidation loans.

Credit card ‘super balance’ deals

If you’re disciplined at repaying and have a good credit score, there are some 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 to do this.

Make sure you check what charges are payable - including for exiting your personal loans - and that you’ll be able to pay off the debt before any introductory period ends.

Read more about super balance transfers on MoneySavingExpertopens in new window.

Reducing your loan with extra payments

If you can’t repay an unsecured personal loan in full you can make part payments any time, so that you pay off the loan quicker and reduce the overall cost.

With most loans, you can make extra payments of up to £8,000 in a 12-month period without penalty.

If you repay more than that, the amount you can be charged is capped by law - at either 1% or 0.5% of the entire amount repaid.

Make sure you tell the lender that you want the payment to be treated as an ‘early repayment’ rather than just an over-payment, so they use it to reduce your balance.

Claim back payment protection insurance

Some lenders have sold payment protection insurance in the past.

You might not have been aware of it or been able to make a claim on it.

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

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

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