Definition
An early repayment fee is a charge some lenders apply when a loan is repaid before the end of its term. It may be a fixed amount, a percentage of the balance or a calculation set out in the contract. Combined with break costs or fixed-total pricing, it can reduce or remove the saving from paying a loan off early, so check the terms before signing.
Paying a loan off early sounds like it should always save money. Early repayment fees are one reason it sometimes does not.
How they work
Contracts may set a flat fee, a percentage of the remaining balance or a formula. Some fees reduce over time; others stay the same. They are separate from break costs on fixed-rate periods and from pricing structures where the total cost is fixed at the start.
Check before you sign
Ask the lender to explain early repayment in writing, with an example halfway through the term. If you expect a sale, refinance or windfall, a loan with fair early repayment terms may be worth a slightly higher price.
When the time comes
Request a dated payout figure and compare it with what you would otherwise pay using the early payout savings calculator. Our guide to payout figures explains more. Thinking of refinancing? Make one enquiry.
Common questions
Do all business loans have early repayment fees?
No. Some have none, some have fixed fees, and some are priced so that most of the cost is payable regardless of when you repay.
How do I know if paying early will save money?
Ask for a written payout figure and compare it with the repayments left. The early payout savings calculator does the comparison.
Sources and further reading
Related terms