Some personal loans are more flexible than others. Some offer you the ability to overpay every month or make additional lump sum repayments. These facilities allow you to clear a personal loan balance far faster than would otherwise be possible.
Some loans also allow repayment holidays – though you should realise that every time you take a payment holiday you increase the size of the remaining monthly payments, as the loan interest will continue to build up. In general, flexible personal loans are slightly more expensive than inflexible ones.
If you intend to pay your personal loan off early then it is well worth examining the small print to see if you will incur an early redemption (or early settlement) charge if you do so. Make sure that you do this before committing to a personal loan, as the early redemption charges could be as much as two months interest.
You could get a refund of some of the interest
If you repay your personal loan early then you may well receive a refund of some of the interest you have paid. This happens because personal loans tend to calculate the interest payable over the whole term of the loan, add it to the sum borrowed and then divide the total into equal monthly repayments. So, if you repay the total repayment amount early, you will have paid an interest bill calculated over the full term of the loan. As interest is often ‘front loaded’ to the start of the loan period this means that you will have paid out more interest than you needed to.
One system used by the lenders for working out how much interest you are refunded is called the Rule of 78. It is not a legal guideline but it has been accepted as the way to calculate refunds on some personal loans. However, lenders may also choose do an actuarial or pro rata calculation of the interest and these will not create the same result.
