Paying Off Your Loan Early in Nigeria: Good Idea or 'Penalty' Trap?

Imagine you took a loan for 12 months, but your business boomed, and now you have enough cash to pay it all back in month 6. Being debt-free sounds like freedom, right?

Wait! In Nigeria, paying early might actually cost you extra money. This is called a Pre-liquidation Penalty.

What is Loan Prepayment (Liquidation)?

Loan prepayment means paying off your entire loan balance before the agreed tenure ends.

• Example: You borrowed ₦1M for 12 months. At month 6, you pay the remaining balance of ₦500k at once.

The Cons: Why Banks Hate Early Payment

Banks make money from the interest you pay each month. If you pay early, they lose that future interest profit. To protect themselves, many Nigerian banks charge a fee.

1. Pre-liquidation Fee

Typically 1% to 2% of the outstanding amount.

• If you owe ₦500,000 and want to pay early, the bank might charge you an extra ₦10,000 fee.

2. Interest is Often Front-Loaded

If you took a loan with Flat Rate interest (common in microfinance), the interest is already calculated into your total debt. Paying early usually does not save you money on interest because you already agreed to pay the total fixed amount.

The Pros: When Should You Pay Early?

Despite the fees, paying early can still be smart if:

1. It's a Reducing Balance Loan: If your loan is from a mortgage bank or a transparent commercial bank (like Stanbic or Zenith), paying early should reduce your total interest significantly.
2. You Want Peace of Mind: Sometimes, the mental relief of being debt-free is worth the small penalty fee.
3. You Need a New Loan: Clearing an old loan improves your creditworthiness if you want to apply for a bigger amount.

Checklist Before You Liquidate

• Check your Offer Letter: Look for the clause titled "Prepayment" or "Early Liquidation".
• Ask the Bank: "If I pay today, exactly how much do I pay? Is there a penalty?"
• Compare: If the Penalty Fee > Interest Saved, don't pay early. Just keep the cash in a high-yield savings account (like PiggyVest) and pay monthly.

Conclusion

If you borrowed from a Loan App or MfB with a Flat Rate, paying early rarely saves you money. They will demand the full interest anyway. If you borrowed from a Commercial Bank with Reducing Balance, paying early is usually a great idea.

Use our Loan Calculator to simulate how shortening your tenure reduces total interest.