Banks commonly give borrowers a limited window — the cooling-off period — during which a personal loan can be cancelled with little or no cost. This option exists to protect consumers who change their minds after signing loan documents or discovering terms they didn’t expect. Knowing how the cooling-off period works helps you act quickly and avoid unnecessary fees.
What is the cooling-off period?
The cooling-off period is a short time after a loan agreement is signed when the borrower can cancel the contract without major penalties. The exact length and rules vary by lender and by country, but the principle is the same: borrowers get a chance to reconsider before the loan becomes final.
Why banks allow cancellations
- Consumer protection: It reduces the risk of rushed decisions or signed contracts that the borrower doesn’t fully understand.
- Regulatory compliance: Many regulators require a cancellation window for certain credit products.
- Reputation and service: Allowing cancellations can improve customer trust and reduce disputes later on.
Typical terms and charges
Most banks permit cancellation during the cooling-off period with little or no charge, but terms can vary:
- No charges: Some lenders refund all fees and interest if you cancel within the allowed timeframe.
- Low administrative fee: Other lenders may retain a small administrative fee to cover paperwork and processing costs.
- Interest on any disbursed funds: If the bank already disbursed money, you may owe interest for the days the funds were available to you.
- Non-refundable third-party costs: Charges for services like insurance or valuation, paid to third parties, may not always be refundable.
Important note
Details differ by lender and jurisdiction. Check your loan agreement or contact the bank immediately to understand the specific cost implications for your loan.
How to cancel a personal loan: step-by-step
- Review the loan documents to find the cooling-off period length and cancellation procedure.
- Contact the lender right away by phone to notify them of your intention to cancel, then follow up in writing.
- Send a written cancellation request via email or registered mail. Keep a copy for your records.
- Return or repay any disbursed funds as instructed by the bank. Confirm whether you must pay interest for the days the money was with you.
- Request written confirmation that the loan has been cancelled and note any refunds or fees applied.
- Keep documentation of all communications, receipts, and bank statements until the matter is fully resolved.
Sample short cancellation message
“I wish to cancel my personal loan contract (Loan Account No: XXXX) under the cooling-off clause. Please confirm the cancellation and advise any amounts due and refund timelines. Thank you.”
Documentation and timing
Act quickly. Many cooling-off periods are short, and delays can mean losing the right to cancel without penalty. Keep copies of:
- Loan agreement and terms
- Cancellation request (email or letter)
- Bank confirmations and refunds
- Receipts for any repayments you make
Impact on credit score and future borrowing
Cancelling a loan within the cooling-off period usually has minimal impact on your credit score. However, if the cancellation process causes missed payments or if you repeatedly apply and cancel loans, lenders may view your credit behaviour as less stable. Always confirm with the bank how they will report the cancellation to credit bureaus.
When cancellation may not be possible
- If the cooling-off period has expired.
- If the loan funds were spent and cannot be repaid immediately.
- If specific clauses in the agreement exclude cancellation for particular products or uses.
Practical tips to avoid needing cancellation
- Read the loan agreement carefully before signing.
- Ask for a clear schedule of fees, interest, and prepayment rules.
- Compare offers from several lenders to find the best overall cost.
- Keep communications in writing and save all documents.
Knowing your rights and the lender’s procedures makes cancelling a personal loan straightforward if you need to do it. Act promptly, keep records of every step, and confirm in writing that the cancellation and any refunds are complete.