What Car? Q&A - Can I pay off a loan early?

Q: I've just received a windfall. Can I pay off my existing loan early?
Sarah Rice

A: Yes, but most lenders will charge for settling a loan early as 'compensation' for the money they'll have lost out on from your repayments.

It's an increasingly competitive market, however, so more and more loans are now available with no early settlement charges if your circumstances change. Look out for these when you're shopping around.

The calculations for working out how much a loan will cost to settle are complicated and were changed in May 2005 in a bid to make them fairer to consumers.

Lenders can apply the earlier 'rule of 78' settlement calculations (a highly complicated formula to work out early resettlement) until May 2007 if you took out the loan before last May and it was for less 10 years. If the loan is for 10 years or more they can use it up until May 2010.

The National Consumer Council is still calling for early settlement charges to be completely scrapped.