Pay Off Secured Loan Early? Here's How to Save Big

Picture this: you're finally in a position where you can pay off your secured loan early. It's an exciting prospect, freeing yourself from debt sooner than expected. But before you rush to make that final payment, it's crucial to understand the implications and whether it's the right move for your financial situation.

Understanding Secured Loans

Secured loans are financial products backed by an asset, such as a car or property, which serves as collateral. This security reduces the lender's risk, often resulting in lower interest rates compared to unsecured loans. In Australia, secured loans are popular for substantial purchases like homes or vehicles.

One of the key features of a secured loan is the necessity to repay within the agreed-upon term, usually ranging from 1 to 30 years for mortgages, and up to 7 years for car loans. However, the possibility of paying off the loan early can be a double-edged sword, offering both benefits and potential pitfalls.

Current Market Rates and Considerations

In 2026, the interest rates for secured loans in Australia typically range between 6.49% and 12%, depending on factors like the borrower's credit score, loan term, and the asset's value. While paying off a loan early might seem financially savvy, it's essential to consider any associated costs.

Before deciding to pay off your loan early, check with your lender regarding any early repayment fees. These fees can sometimes negate the benefits of paying off the loan early, as they are designed to compensate the lender for lost interest income.

Steps to Pay Off a Secured Loan Early

Paying off a secured loan early involves strategic planning and communication with your lender. Here’s a step-by-step guide to help you navigate the process:

1. Review Your Loan Agreement: Check for any clauses related to early repayment, including potential fees or penalties.
2. Calculate the Costs: Use a loan repayment calculator to determine the total interest saved versus any penalties incurred.
3. Contact Your Lender: Discuss your intentions with your lender or mortgage broker, like Esteb and Co, who have access to over 83 lenders and can offer tailored advice.
4. Plan Your Finances: Ensure that paying off the loan won't leave you short on emergency funds or other financial obligations.
5. Make the Payment: Once you're ready, proceed with the payment, making sure to confirm with your lender that your account will be closed or adjusted accordingly.

Tips and Considerations

Here are some expert tips to consider before paying off your secured loan early:

• Evaluate Your Financial Goals: Consider whether paying off your loan aligns with your broader financial objectives, such as saving for retirement or investing.
• Understand the Impact on Credit Score: While clearing debt is generally positive, closing a long-standing loan account might affect your credit score. Keep an eye on your credit report.
• Consider Refinancing: If early repayment fees are substantial, refinancing might be a viable alternative. Esteb and Co's broad lender panel could help you find a more favourable rate.
• Factor in Inflation: In a high-inflation environment, keeping a low-interest loan while investing elsewhere might offer better returns.

Frequently Asked Questions

1. Are there penalties for paying off a secured loan early?

Yes, many lenders impose early repayment fees to offset lost interest revenue. Check your loan agreement for specific details.

2. Is it always beneficial to pay off my loan early?

Not necessarily. Consider factors like early repayment fees, your financial goals, and potential investment opportunities before deciding.

3. Can I partially pay off my secured loan instead of the full amount?

Yes, partial payments are often possible and can reduce your principal, thus lowering future interest payments.

4. How do early repayments affect my credit score?

Paying off a loan can initially lower your credit score due to the closure of a credit account, but the overall impact is generally positive over time.

5. What is the process for paying off a secured loan early?

Review your loan terms for early repayment conditions, calculate the costs, contact your lender, and ensure your finances are in order before making the payment.

6. Can I refinance my loan instead of paying it off early?

Yes, refinancing can be a good alternative if early repayment fees are high. It allows you to potentially secure a lower interest rate or change your loan term.

7. Should I consult a financial advisor before paying off a loan early?

Consulting a financial advisor or a mortgage broker like Esteb and Co can provide personalised advice tailored to your financial situation.