How do you pay back a loan?

When you take out a loan, you and the lender will have agreed how long you have to repay the full amount. This is usually between 1 and 7 years.

Although you receive the loan in one lump sum, you'll most likely have to repay in monthly instalments.

Exactly how much you pay depends on the size of the loan, the length of the loan term, the interest rate and whether it's a fixed or variable.

Make sure you know what date the payments are due each month. If you miss a payment, you'll be charged a fee and get a hit on your credit report. The more hits, the worse your score.

How are loan payments taken from your account?

Most lenders let you choose how to make your loan payments when you first apply for your loan.

The most common ways to repay a loan are by:

  • Direct debit, where the lender takes the payment you owe directly from your account

  • A recurring payment on debit or credit card. Also known as a 'continuous payment authority' (CPA), the lender can take the money you owe at their own discretion

  • Standing order, where you pay a fixed amount out of your account to the lender at regular intervals

Direct debits are a good option because it's the lender's responsibility to take the payment. This makes missing a payment less likely and so keeps your credit score intact.

Can you take a break from loan payments?

Breaks from loan payments are known as payment holidays. Some lenders may give you a payment holiday but you must agree it with them first. You'll also need to meet certain conditions and prove you can continue to repay the loan when the 'holiday' is over.

You cannot simply stop paying back the loan without the lender knowing, even if you're planning to restart payments the following month. It will look like a missed payment and hit your credit file hard.

Payment holidays are only a short term fix. Though you may be able to stop repayments for a while, the loan may become more expensive because:

  1. You're charged interest during the holiday meaning you have to pay more interest overall

  2. You might be charged a fee

  3. The loan term is extended by the amount you took as a payment holiday

Can you cancel your loan?

Yes, you can cancel your loan within the cooling off period. This is 14 days of signing the loan agreement, or when you received a copy in the post (whichever is later).

You must pay back the full loan amount (and any interest due for the time you had the money) within 30 days of cancelling.

Can you make changes to your loan?

There are a number of reasons why you may need to change your loan. For example:

  1. Your personal details have changed

  2. You need to change the loan term

  3. You want to borrow more money

Updating your personal details on a loan

If your personal details change you should let your lender know as soon as possible. Changes include:

  • Moving house

  • New contact details, like your phone number or email address

  • Your employment status changes

  • You change your name

The easiest way to do this is to ask your lender how they update their records.

Extending your loan term

If you need more time to pay back your loan, you could ask your lender to extend the loan term.

This would reduce your monthly payment amounts but will cost you more in the long run because you'll be paying interest on the debt for longer. There may also be a fee to change the term.

Increasing the loan amount

In most cases you cannot increase the amount of your loan. Instead, you'll need to either:

  • Apply for another loan to run alongside your existing loan

  • Apply for a larger loan to pay off your current loan and give you the extra money you need

The lender will need to check your your credit record to be sure you can repay the loan.

Remember, lots of checks on your credit file makes you look desperate for credit and like an unreliable investment.

Can you pay off your loan early?

If you want to fully pay off your loan early, ask your lender for an early settlement amount.

This shows:

  • Your outstanding loan balance

  • Any interest being deducted

  • Early repayment charges

  • The final settlement amount

The final settlement amount is only valid for a set period of time, the minimum of which is 28 days. It should contain details of how to pay off your loan.

To pay off part of your loan early, ask the lender for a partial early settlement detailing exactly how much you want to pay off.

Do you have to pay fees to pay off a loan early?

Most likely, lenders can charge up to 58 days of interest to cover their losses if you choose to repay all of your loan early.

Your lender cannot charge any extra fees if your loan is unsecured and less than 8,000.

For unsecured loans over 8,000, the most you can be charged is 1%, or 0.5% of the entire amount repaid.

The lender can charge more on secured loans. Taking all extra fees into consideration, be sure that paying the loan off early will actually save you money.

What if something happens which means you cannot pay off the loan?

Despite your best intentions, things may crop up that will affect your loan repayments. These include:

  1. Emigrating to another country

  2. Being sent to prison

  3. Death

Emigrating to another country

You'll still need to make the agreed payments on time.

If you move to another country and stop paying your loan, the lender will report your missed payments to UK credit reference agencies. This means it will show up on your credit report and damage your credit score.

The lender may also hire a debt collection agency in your new country of residence to pursue the debt.

If you plan to emigrate overseas, speak to your lender as early as possible. They may be able to offer some flexibility or even transfer the loan to a branch in your new country.

Being sent to prison

If you're due to go to jail before your loan is paid off, contact your lender immediately.

Payments do not stop automatically, but you could ask your lender for a payment break until you're released. The lender does not have to agree to this and they may continue to charge you.

Alternatively, you can appoint someone (normally a family member), to manage your loan while you are in prison. This person will look after the loan for you until you are released.

Death

If you pass away, the outstanding loan balance is taken out of the value of your estate.

Your debts are paid off before any money is passed to your heirs. This is done in the following order:

  1. Secured debts, for example your mortgage or secured loans

  2. Funeral costs

  3. Unsecured debts, like personal loans

If there is not enough money in your estate to pay off your loans then the remaining debt will be wiped. However, there are exceptions, such as:

  • Joint loans, where the surviving person will have to repay the outstanding balance

  • Secured loans that can be recouped by the lender selling the secured asset

  • Guarantor loans, where the guarantor will have to pay the loan back

Find out what to do if you think you'll be unable to pay back your loan.

Managing your loan FAQs

Q

Can someone else pay off my loan?

A

Some lenders may not allow someone else to pay off your loan. Check the terms and conditions or speak to your lender to ask.

Q

How can I find out how much I still owe on my loan?

A

Contact your lender to get an up to date loan balance. If you want to pay this balance off, you should ask for an early settlement amount.

Q

Can I pay off a loan with another loan?

A

Technically, yes. In fact, debt consolidation loans are designed for that purpose. Remember though, applying for too many loans will not look good on your credit record.