How Early Repayment Charges Are Calculated
Secured loan ERCs are typically calculated in one of two ways: as a number of months' interest on the outstanding balance, or as a flat percentage of the outstanding amount at the time of redemption. The most common structure in the secured loan market is a charge equivalent to one to three months' interest on the balance being repaid early, though some lenders apply a percentage charge that can be more significant on larger balances.
For example, if your outstanding balance is £25,000 and your ERC is equivalent to three months' interest at your loan rate of 9.9% per annum, the annual interest on £25,000 at 9.9% is approximately £2,475, so three months' interest would be approximately £619. This is the early redemption penalty you would pay in addition to settling the remaining capital balance.
Some lenders structure their ERCs as a declining scale — for example 3% of outstanding balance in year one, 2% in year two, 1% in year three, and zero thereafter. This type of structure rewards borrowers who wait until the ERC period expires before repaying. Always ask for the ERC schedule in writing at the time you receive your loan illustration so you know exactly what the charge would be at any point during the term.
When Early Repayment Charges Apply
ERCs typically apply when you make a full early redemption — repaying the entire outstanding balance before the scheduled end date. Some loans also include ERCs on partial overpayments above a certain annual threshold, though this is less common in secured lending than in the fixed rate mortgage market. Many secured loans allow unlimited overpayments without any charge as long as you do not redeem the loan in full before the ERC period expires.
The ERC period is usually defined in your loan agreement and starts from the date the loan completes. On a five-year term loan, a common structure is an ERC that applies for the first two or three years and then expires, leaving you free to repay without penalty for the remainder of the term. Some products — particularly variable rate or fee-free secured loans — carry no ERC at all from day one.
Redemption can be triggered not just by choice but also by certain life events. If you sell your home, the secured loan will typically need to be repaid from the sale proceeds, and if the ERC period has not expired, the charge will apply. This is an important consideration if there is any possibility of selling the property during the ERC period. Check your loan terms before accepting an offer if this is a realistic scenario for you.
