Len Burgess
When you borrow money, you’ll be told how to pay back each month. If you make overpayments, paying more than you need to, you can clear your debt early. With loans where you can make overpayments, you’ll have more control.
When you first apply for a loan, you’ll be given a loan payment schedule. This schedule provides your payment dates, usually once per month, along with the value of each payment.
If you stick to your payment schedule, your debt will be gone by the final payment date. If you have extra money, you can consider making overpayments.
Some loans let you make overpayments. This will reduce the amount of interest you will pay overall, as it is calculated based on the amount left to pay. Even a small extra payment can have a big impact on the total you owe.
Overpayments help you to clear your debt earlier than you otherwise would have. Loans where you can make overpayments usually come in two forms. With some loans, overpayments come without additional charges and can reduce the interest that you pay.
In other cases, when you make overpayments you may be charged a fee or could still pay interest as though your loan ran to the end.
Read on for more information about loans where you can make overpayments.
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Overpayments are a great way to clear your debt early, if you have the money available. Most people choose to do this, if they can, so they don’t have the loan hanging over them. Being debt-free, or having debts in fewer places, brings an important sense of freedom. If you have the money available to use, you might as well pay off your loan early.
Some lenders encourage overpayment and want you to clear your debt early. In these cases, you’ll usually be able to reduce the cost of your loan. Where interest would have accumulated monthly, you won’t need to pay the interest for the months that you’re no longer spending in debt.
Some lenders will try to get as much money out of you as possible. They’ll let you make overpayments, but may calculate the interest as though your loan had run to its original deadline. They don’t want to miss out on money they’ve planned for, just because you have the cash available.
As well as differences in how they handle overpayments, different lenders also charge different fees. Some loans where you can make overpayments don’t come with any extra charges, but in other cases there are extra fees for making those early loan repayments.
With the extra money, how you handle overpayments is really up to you. If you’ve chosen a lender that offers flexibility, you might top up your payments each month. So, each month, if you’ve got spare cash available, you’ll add this on to your payment. This will slowly bring forward the date when your loan will be paid off.
Alternatively, you can save your spare money until you’ve got enough to pay in full. This is usually the preferred option, saving time and reducing fees and charges. Once you have enough money to clear your loan, you can ask to make a full and final payment.
Lenders will calculate any additional fees and charges, though you’ll usually pay less than you would have paid if you’d kept to the original schedule.
For some loans where you can make overpayments, everything’s done through the website. You’ll have an online account so that you can log in and pay whenever you want. The lender’s website should calculate the cost of full and final payment if that’s what you’re choosing to do.
Some lenders will require you to call about making overpayments. This is less convenient, though works in the same way and those charges and fees can still be added.
Don’t worry that an overpayment shows you can pay more every month. Your monthly payments won’t change just because you’ve made an overpayment.
In most cases, lenders are happy to accept overpayments every month. You could pay the same higher amount each month, or vary how much you overpay.
As well as making regular smaller overpayments, or waiting until you’ve got enough to completely clear your debt, you can choose to make lump sum overpayments on your loan. A lump sum overpayment is a larger amount, usually made as a one-off payment somewhere in the course of your loan term.
When you make a lump sum overpayment, this money is simply taken off the amount that you now owe overall. You could end up saving some interest, but unless you’ve covered the total loan value then you’ll still be kept on your payment schedule. You’ll still pay your usual monthly amount, and your loan will simply be paid off sooner than it otherwise would.
A lump sum overpayment might be something you make after a bonus at work, a competition win or a birthday when you’ve received cash gifts.
If you’re applying for a loan, you may not be thinking about making overpayments. When people need a loan, they’re usually not preparing for a time when they have extra cash available. Fortunately, many lenders are happy to take overpayments. Even if you’ve already borrowed, it’s worth checking with your lender to see their overpayment policy.
If you’re applying and know that you should have more money available to clear your debt in future, check with any lender to see how they handle overpayments. It’s worth checking not just if they accept overpayment, but also how they’ll handle the remaining interest you would have paid. A lender that’s happy to recalculate your interest will help you to keep more of your money.
Look out for overpayment fees. Some lenders charge these because they want you to stay in debt for longer. Lenders make money by charging monthly interest and keeping you as a debtor, so some will add an extra charge if you want to get out of debt sooner.
Making loan overpayments will help you to clear your debt earlier. It feels great to be out of debt and to know that you’re back on solid ground. Many people are happy to scrimp and save where they can, so that they can overpay their loans.
Making loan overpayments can also save money if your lender will recalculate your interest. It’s often more expensive to let your loan run until the end of its original loan term.
Overpayments are usually a wise financial choice, with very few drawbacks for borrowers. If you have the cash available to make an overpayment, it’s worth seeing if this is an option.
Here’s an example of how making overpayments could cut down the interest you pay, and also end your loan much faster.
For this example, we’ve assumed a loan rate of £5,000 to be repaid over three years. The interest rate is set at 5%.
Regular Payment | Overpayment | Total paid each month | Duration of loan (months) | Total Amount paid | Total Interest |
£149.85 | £0.00 | £149.85 | 36 | £5,394.75 | £394.75 |
£149.85 | £50.00 | £199.85 | 27 | £5,291.38 | £291.38 |
£149.85 | £100 | £249.85 | 21 | £5,231.73 | £231.73 |
£149.85 | £150.15 | £300.00 | 18 | £5,193.02 | £193.02 |
As you can see – making even a small overpayment of £50 per month saves you 9 months on the loan term, and over £100 in interest over the duration of the agreement. Paying more can bring the duration down dramatically further, and save you even more.
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