How an early repayment charge is set
UK business lenders call this an early repayment charge, and some call it a prepayment penalty or a break cost. It depends entirely on your agreement. Some lenders charge nothing, and others charge a percentage of the amount repaid, a percentage that falls each year, or a number of months of interest. One UK comparison guide reports, for example, that HSBC charges a month plus 28 days' interest to clear a business loan early, while it lists several other lenders as charging nothing. Terms change, so check your own agreement.
On a regulated consumer credit agreement, a lender may charge interest for 28 days after your notice, plus one more month if the term is over a year, according to Business Expert. Most limited company business loans are not regulated agreements, so the charge in your contract applies.
For a regulated personal loan, use the early repayment calculator .
Worked example: £250,000 at 8% after 14 payments
A £250,000 loan at 8% repaid over five years has a balance of £200,245.74 after 14 payments. With a charge of two months' interest on the amount repaid, the charge is £2,669.94, so you pay £202,915.69 to settle. That is 1.33% of the amount repaid.
Settling avoids £32,932.79 of interest, so the saving after the charge is £30,262.85.
Waiting ten months, until the start of loan year 3, would cut the charge to £2,156.85. You would pay £12,209.33 of interest in the meantime, so waiting costs £11,696.24.
Percentages, step-downs and months of interest
A flat 2.5% charge on the same loan is £5,006.14. A charge that steps down 3%, 2%, 1% by loan year costs 1% after 26 payments, which is £1,537.56 on a balance of £153,756.14.
A months-of-interest charge is the monthly interest on the amount repaid, at your loan rate, times the number of months. A clause of a month plus 28 days is close to 1.9 months.
Paying part of the loan
A £60,000 lump sum with a 2% charge costs £1,200.00. Your regular payment stays the same, so the loan ends 15 months sooner, with 31 months left. You avoid £17,630.34 of interest.
Many lenders let you overpay a set amount each year with no charge. Check whether yours does, because it can make a lump sum cheaper than this calculator shows.
When waiting beats paying now
Suppose a £400,000 loan at 3% over ten years carries a 6% charge in the first three years and none after. After 33 payments the charge is £18,099.72. Three months later the charge is £0.00. You pay £2,239.13 of interest meanwhile, so waiting saves £15,860.58.
Near the end of a loan there is little interest left to save. On a £250,000 loan with a 4% charge in every year, repaying after 50 payments means a balance of £48,880.83 and a charge of £1,955.23. You avoid £1,810.16 of interest, so the charge is £145.07 more than the saving.
What this calculator assumes
It assumes a fixed rate, equal monthly payments, and that you repay straight after a scheduled payment, with no accrued daily interest, lender fees, legal costs or VAT. Commercial mortgages and fixed-rate loans can carry break costs set by market rates, which this calculator does not model. Your lender's settlement figure is the one that counts.
This page uses UK terms and pounds sterling. The country choices above the inputs open separate pages. Choosing United States opens the prepayment penalty version, which adds lock-out and SBA 7(a) choices.
For a US loan, use the US commercial loan prepayment penalty calculator .
Inputs for the UK prepayment penalty calculator
How the charge is set
The clause in your loan agreement. Step-down uses the five yearly percentages.
What you repay
The whole balance, or a lump sum with your regular payment unchanged.
Original loan amount
The amount first borrowed, before any payments.
Interest rate
The yearly rate, charged monthly.
Repayment term
The years over which the payments are calculated.
Payments already made
Monthly payments made so far. The repayment follows the last one.
Lump sum
Used only when you repay a lump sum. It must be below the balance.
Charge in loan year 1
Percent of the amount repaid in the first 12 months. The one-percentage choice uses this box.
Charge in loan year 2
Step-down choice only.
Charge in loan year 3
Step-down choice only.
Charge in loan year 4
Step-down choice only.
Charge in loan year 5
Step-down choice only. No charge after year 5.
Months of interest
Used by the months-of-interest choice.
CALCULATOR QUESTIONS
UK commercial loan prepayment penalty calculator questions
How is an early repayment charge on a business loan calculated?
It depends on your agreement. A common form is a percentage of the amount repaid, or a number of months of interest. On a balance of £200,245.74, two months of interest at 8% is £2,669.94.
Do all UK business loans have an early repayment charge?
No. Some lenders charge nothing and others charge a percentage or months of interest. Read the early repayment clause in your agreement or ask your lender for a settlement quote.
Is it worth paying an early repayment charge?
Compare the charge with the interest you avoid. On the worked example the charge is £2,669.94 and the interest avoided is £32,932.79. Near the end of a loan the charge can be larger than the saving.
Does the 58 days' interest rule apply to my business loan?
The consumer rule on regulated agreements allows interest for 28 days after your notice, plus a month on terms over a year. Most limited company business loans are not regulated agreements, so the charge in your contract applies.
Should I wait for a step-down before repaying?
Only if the lower charge outweighs the interest you pay while waiting. In the worked example, ten months of waiting costs £11,696.24 more than repaying now.