What is an early repayment charge?
An early repayment charge (ERC) is a fee charged by lenders when you repay a fixed-term loan before the agreed end date. It compensates the lender for the interest they will no longer receive. ERCs are typically expressed as a number of months of interest, such as 2 months, or as a percentage of the outstanding balance, such as 2%. Always check your loan agreement before settling early.
Is it always worth repaying early?
Not always. If your ERC is high and you are early in the loan term, the charge may exceed the interest you would save by repaying early. The later in the loan term you settle, the less interest remains and the more likely early repayment makes financial sense. This calculator shows the net saving after the repayment charge.