Borrowers that repay loans early are being hit with an average £50 penalty, according to the Department of Trade and Industry (DTI).

Consumers are often unaware of early repayment charges as they can be tucked away in the small print of the credit agreement.

At present, under the Consumer Credit Act, loan companies can ask customers that repay loans early to pay a charge.

Consumers should be free to repay loans early without fear of penalties, says Consumer Minister Melanie Johnson.

The DTI estimates that almost 70% of personal loans are settled early.

Most people agree that early repayment penalties serve no purpose other than to extract money from customers.

Stuart Cliffe

Consumers who repay large loans early could save a small fortune if the penalties were abolished, says the DTI.

In one case, a borrower looking to repay a £2,875 loan early was asked to pay a penalty of £472.

"I know from my postbag that many consumers are shocked when they find out how much it will cost them to settle some credit agreements early," said Miss Johnson.

Consumer wait

However, consumer groups are getting impatient for action, as this proposal was originally outlined as part of the DTI's ongoing review into consumer credit more than a year ago.

"It seems that most people agree that early repayment penalties serve no purpose other than to extract money from customers. However, the government while talking tough have not grasped the legislative nettle," said Stuart Cliffe, director of the National Association of Banking and Insurance Customers (NABIC)

The DTI told News Online that they are considering introducing a loan watchdog or even a tribunal to rule on disputes between lenders and consumers.

Mr Cliffe though isn't holding out much hope.

"A body that consumers can go to seems a good idea but it is no replacement for changes to the Consumer Credit Act," he said.