What happens if I pay my loan off early?


If the opportunity comes to pay a loan off early, many will do it, but is this always the best option? In this article, we discuss early loan repayments and when it can be a good choice.

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When making any financial decision, it’s a good idea to look closely at your agreements, read the fine print, and ensure you have a clear understanding of any early repayment charges that may apply to your loan before entering into it. Most lenders will have a prepayment fee that borrowers must pay if they decide to pay off their loan before the final payment date. Avanti Finance, for example, has a $55 full prepayment fee.

Is your loan variable or fixed term? Early repayment charges may vary depending on the agreement you have made with your lender. Typically, there are two types of repayment fee: a prepayment administrative fee and a break cost.

Variable loans (sometimes called ‘floating’ interest loans) often don’t include a break cost. You’ll know you have a variable loan because your repayments change every so often. If there’s no early repayment fee, then there are no penalties to using a sudden windfall (higher commission at work, a bonus, an inheritance, etc) to pay your debt early.

Fixed-term loans have a fixed interest rate, meaning the interest will remain the same throughout the duration of your loan term. This makes it easy for a borrower to know how much they’ll be paying each month, making fixed-term loans ideal for the long term. If you are repaying a fixed term loan early, you may need to pay both the prepayment administrative fee and an additional break cost.

Unsure of what the right choice for you is when you’re considering a loan? It’s wise to speak to your financial advisor before agreeing to any loan terms.


Once you know what fees you could be paying, it’s time to do some math. There may be the obvious benefit of becoming debt-free faster, but in some cases, this can be a disadvantage. Depending on your finance provider and lending terms, you could end up paying more than you bargained for.

You want to compare all costs associated with early repayment to the interest you’ve agreed to pay. This can give you a clear idea of any money you could be losing by paying early. The Responsible Lending Code states that prepayment fees should not exceed further than the estimated financial loss due to the early repayment, but the exact fee varies case-to-case based on provider and loan terms.

Here’s a rule of thumb. Find out how much the early repayment fees would be – your lender will be able to tell you. Then add up the amount you’d pay in interest over the remaining term of the loan. If the early repayment fees are higher than the remaining interest you would pay, then you’d end up spending more by paying your loan early.


Your loan provider should give you some insight into whether repaying your loan early will be beneficial. This can give you some extra confidence that you’re making the best decision for your finances.

Generally, the longer your loan term is, the more interest you’ll be paying—depending on your interest rate—so if you can afford to, it could be worth settling early. A thorough understanding of your contract is crucial to deciding whether you want to pay early.

It’s important to speak to a financial advisor before making big finance-related decisions. As specifics change on a case-to-case basis, seeking professional advice about repaying your loan early will give you some valuable insight into whether it’s a wise decision for your life right now. You should understand any potential break fees (and any other fees!) before entering into any loan agreement.

We take the time to consider your financial situation to help you get into a better position. Avanti Finance offers home, car, and personal loans in NZ for Kiwis to pay for the things they need if they’re short of cash. Get in touch with the Avanti team today and we can give you a helping hand to get ahead of your finances.



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