Coming into money before the due date means you can settle a payday loan early, and the law limits what you can be charged when you do. Here is how the rebate works and the steps to close the loan properly.
Need to know
- UK law gives borrowers a statutory right to repay a loan early with a rebate of interest, under the Consumer Credit (Early Settlement) Regulations 2004.
- FCA rules mean interest only runs for the period you hold the money, and lenders cannot penalise you for settling early.
- Ask the lender for a written early settlement figure covering the principal plus interest to a specific date, then get written confirmation that the account is closed and nothing further is owed.
- Paying early does not erase the record of the loan from your credit file; it stays for the usual reporting period.
- If the rebate or balance looks wrong, complain to the lender free of charge and escalate to the Financial Ombudsman Service after eight weeks.
If money arrives before your payday loan falls due, you do not have to wait until the due date. The law gives you the right to repay early, and because interest builds day by day, settling sooner usually costs less. This guide walks through the rules, the steps to get a settlement figure, how to pay and confirm the loan is closed, and what to do if the numbers look wrong.
Paying Early Is a Right, Not a Favour
Early settlement is the legal term for repaying a credit agreement before its agreed end date. Under the Consumer Credit Act 1974, as amended by the Consumer Credit Act 2006, you have a statutory right to early repayment with a rebate of interest. The Consumer Credit (Early Settlement) Regulations 2004, which came into force on 31 May 2005, set out how that rebate is worked out.
A rebate means the part of the interest and charges attached to days you no longer borrow, which is deducted from what you owe. Lenders cannot treat early repayment as a favour to be granted at their discretion. FCA rules tie the charge to the time the loan is outstanding, so interest accrues for each day the money is in your hands rather than across the whole agreed term, and most UK payday lenders allow early repayment. Holding the loan for fewer days keeps the overall cost down.
How the Interest Rebate Is Worked Out
The arithmetic behind the rebate is straightforward. Under FCA rules, interest on payday loans is capped at 0.8% per day of the amount borrowed, so the charge builds with every day the loan is outstanding. Because interest should only run for the period you actually hold the money, each day you settle sooner is a day of interest you do not pay.
One check before you assume a large saving: FCA rules also cap the total cost at 100% of what you borrowed, so interest and fees combined can never exceed twice the original sum. The FCA price cap on payday loans explains each of these limits with examples. In practice, once a loan has run long enough to hit the total cost cap, settling early can save little or nothing, and at some points in the term the difference may be only a few pounds. Ask for the actual figures for your loan rather than estimating, because the saving depends on how many days early you repay.
Asking the Lender for an Early Settlement Figure
- Contact the lender online or by phone and ask for an early settlement figure. This is the total needed to close the loan: the principal, meaning the amount you originally borrowed, plus the interest that will have built up by the day you intend to settle.
- That figure is yours to ask for, and a lender should supply it in plain terms without unnecessary delay.
- Give the exact date you intend to pay, because interest accrues daily and the figure changes with each extra day.
- If the loan is only days old, ask about the 14-day withdrawal period instead. Consumers have a statutory right to withdraw from a credit agreement within 14 days, which cancels the agreement rather than settling it, and the lender can tell you which process applies.
Helpful step
Because interest is charged per day, a settlement figure quoted for one date may not match what is due if the payment slips. Ask the lender which date the figure covers and whether it will still be honoured if the money arrives a day or two later.
Making the Payment and Getting Written Confirmation
Pay the quoted amount by the method the lender specifies, and check that the sum actually taken matches the figure you were given. If your lender collects repayments using a continuous payment authority (CPA), you will want no further collections taken once the balance is cleared. Our guide to continuous payment authorities explains how these permissions work and how to stop one.
Once the payment has gone through, ask the lender to confirm in writing that nothing further is owed and the account is closed. Keep this with your other records. It is your evidence if the lender later claims a balance remains, or if interest or charges appear on a loan you believed was closed.
Checking Your Credit File After Early Repayment
Early repayment, if the lender reports it, can show as a positive mark on your credit report, because repaying on time or ahead of schedule is the sort of record that reassures lenders assessing a future application. What it does not do is remove the loan from your file. How long entries remain on a credit file follows standard reporting rules, and those rules apply to a loan settled early just as they do to any other borrowing. Our article on whether paying off a payday loan removes it from your credit file covers how this works and what the entry will show.
If the Rebate or Balance Looks Wrong
- Ask the lender first to explain the calculation in writing, setting out the principal, the days of interest charged and any rebate applied.
- If you are not satisfied, complain to the lender free of charge. If the complaint is not resolved after eight weeks, you can escalate it free to the Financial Ombudsman Service.
- For free and impartial guidance on your options, MoneyHelper is available.
If you are ready to settle, contact your lender today, ask for the early settlement figure in writing for a specific date, and keep the written confirmation once the payment has cleared.
Your questions answered
Q: Can a payday lender charge a fee for early repayment?
A: No. You have a statutory right to early repayment with a rebate of interest, so interest should only run for the period you actually hold the money. FCA rules also stop lenders from adding a penalty for settling early.
Q: How much interest will I save by settling early?
A: Interest on payday loans is capped at 0.8% per day, so the saving depends on how many days early you repay. Ask the lender for a settlement figure for your chosen date, because once the total cost cap of 100% of the amount borrowed has been reached, settling early may save little.
Q: Does paying early remove the loan from my credit file?
A: No. Settling early can be a positive mark if the lender reports it, but the record of the loan itself stays on your credit file for the usual period. The loan being repaid in full is shown separately from the file entry being removed.
Q: What should I get after I pay?
A: Ask the lender to confirm in writing that the account is closed and nothing further is owed, and check that no further card collections are scheduled. This avoids misunderstanding or future charges on a loan you have already closed.
This guide is general information, not financial advice. Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk. We don’t arrange loans or work with lenders. Before borrowing, check the lender is authorised on the FCA register, and consider free debt advice from MoneyHelper, StepChange, National Debtline or Citizens Advice.