Penalty fees cut by loan firms

Loan firms have announced a reduction in penalty fees for people choosing to pay off their debts early.

Research by Moneyexpert.com shows more than 1 in 5 loan firms no longer charge early redemption fees e.g. Northern Rock (who also offer a very competitive rate of 5.9%).

It is still a common practise however for the providers to charge a minimum of one month’s interest to those customers opting to clear their balances before the final date agreed. There are even a few providers who charge 2 months interest.

Those seeking a personal loan are asked to research their options well, since a typical loan of £5,000 over a 4year period may cost them an additional £255.70 to pay off early depending on the provider.

The reason providers offer up as to why they charge early redemption penalties is that they lend the cash for a set period of time and fix an interest rate for the duration. They feel justified in charging an early redemption penalty because it is then the BORRROWER who changes the goalposts by reducing the time frame.

It is interesting to note that the Consumer Credit Act of 2004 imposed a restriction on loan providers to charge a maximum penalty of 2months interest for early redemption, however the majority of providers have cut that down to just 1month.

It is also worth noting that of the 90 products on the market, offered by some 64 companies, around 1 in 5 of them charge NO penalties at all.