Early Repayment Charge (ERC)

An early repayment charge (ERC) is a fee levied by some lenders when a borrower repays a loan before the end of its agreed term. It compensates the lender for the interest income they lose when a fixed-term loan is repaid early. ERCs are most common on fixed-rate products and longer-term secured facilities.

ERCs are typically expressed as a percentage of the outstanding loan balance (e.g. 1-3%) or as a number of months' interest. Some lenders taper the ERC over time - for example, 3% in year one, 2% in year two, 1% in year three, then zero. Others apply a flat fee for the first few years.

For businesses that may wish to sell, refinance, or have the flexibility to repay early, choosing a product with no or low ERCs has value even if the headline rate is slightly higher. Always check the ERC terms before committing to a fixed-rate term loan or secured facility. Some alternative lenders offer no-ERC products as a key selling point.

Example

A business takes a 5-year secured loan of £500,000 at a fixed rate, with a 2% ERC in years 1-2 and 1% in year 3. If it repays in full at the end of year 2, the ERC is £10,000 on the outstanding balance.

Related terms