Be careful with the small print

It is reasonable to believe that an early settlement of a loan implies paying only the remainder of the principal lent. However, in reality, if you are planning to repay your loan earlier you will probably end up paying a substantial amount in excess of the capital owed. This penalty is meant to compensate your lender for the interest on the loan.
As estimated by Datamonitor, a business intelligence company, about 70% of loans are settled early. Even more astonishing is that, according to a report by Egg plc, it is estimated that consumers pay over ₤300 million yearly in early repayment costs. Although the government has changed consumer credit laws several times, lenders are still allowed to charge up to a month’s amount in interest.   
If you are thinking about asking for a personal loan or mortgage read the small print carefully. Financial institutions are required to state in their credit agreements all the information regarding early settlement penalties. Some banks and building societies don’t charge early repayment penalties anymore for the sake of becoming more competitive. Avoid paying extra on your loan; compare the options available in the market, understand the small print and ask your lender to clarify confusing provisions.