People who repay loans early will get a fairer deal under changes outlined today. Around seven in ten personal loans are settled early, but people often have to pay big charges. The government wants to scrap the rules that penalise customers.

A new White Paper in the autumn will include plans to:

• Clamp down on loan sharks.
• Magnify the small print of loan agreements.
• Put a stop to irresponsible lending.

The changes will update the UK's 30-year-old credit laws, which were introduced when the market was much smaller and simpler. In 1971 only one type of credit card was available, while now there are around 1,300 cards on the market.

The government will abolish the so-called ‘Rule of 78’ which is often used to set the cost of redeeming a loan early.

In its place, it will probably introduce a new actuarial method that is fairer to both parties and ask lenders to give early settlement examples before any agreements are made.

The Department of Trade and Industry calculated that this could save the average borrower around £50 per loan and those with bigger loans up to thousands of pounds.

Lenders will be allowed to recoup their early settlement administrative costs by claiming one month's additional interest beyond the settlement date.

Consumer Affairs Minister Gerry Sutcliffe said:

"I want to ensure our credit laws meet the needs of a modern credit sector. They must protect consumers by tackling loan sharks, allow unfair loan agreements to be challenged, and ensure consumers know what they are getting themselves into when they sign on the dotted line."