Early repayment of the loan
Getting rid of the debt burden as early as possible is probably in the interest of any borrower, regardless of the type and size of the loan. However, for banks, a preemptive closing means that there will be an under-received profit.
Can I prepay my loan?
Traditionally it is considered that banks are not profitable to repay early: in this way the credit organizations lose interest, which is the basis of their profits. This assertion is confirmed by practice. For example, previously borrowers were charged fees and penalties if they tried to make preventive payments.
For its part, the bank is obliged to accept the premature repayment and make a recalculation. If the repayment is partial, the borrower will be offered options:
- Reduce the amount of monthly payments, leaving the loan term unchanged;
- Reduce the time until loan closing, but leave the amount of monthly installments the same.
Sometimes the bank may insist on one of these options. In the case of full repayment, the borrower settles with the bank ahead of schedule and terminates the loan agreement.
Terms of partial repayment
Despite the unambiguity of the law in terms of early repayment, some banks can put pressure on customers: charging a fee for recalculation, to introduce a moratorium on payments, etc. Here it is important for individuals to know their rights point by point:
- By law, the borrower has the right to repay the loan partially (in full) before the due date specified in the contract. The amount and timing of such repayment is always determined by the borrower himself, except in cases of default. So, if a person has violated the terms of monthly payments, the bank will first send its funds to repay fines, penalties and missed tranches, and only then – to repay the debt.
- Debt repayment to any private or state financial institution is free, i.e. offers no commissions and hidden fees. Moreover, today the banks themselves indicate in the loan agreement that the loan can be repaid early.
- The borrower chooses which format to use – full or partial repayment. The amount of the loan remaining to be repaid or the time until the transaction is completed is not important.
Although the law gives the borrower a lot of rights in the matter of early repayment, some subtleties of the procedure will have to be followed:
- If the customer chooses to repay the debt preventively, he must notify the bank of his decision – preferably in writing. It is also allowed to submit an application through a personal account or by calling a manager.
- The bank must be notified 30 days before the payment is due in favor of partial (full) repayment. But here the law allows “indulgences”: banks themselves can specify in the contract term in which the application (for example, 5 or 10 days).
- It is convenient for the financial institution that the borrower makes a preventive payment on the same day and hour when he is obligated to make the standard monthly tranche. But even this point can be relaxed: the time of payment can be easily moved at the request of the client.
These subtleties are not relevant for every bank. Many organizations today simplify early repayment by automating payments and recalculation (all operations are performed by mobile or Internet bank). Therefore, it is worth checking with your bank beforehand about the procedure.
Is early repayment profitable?
Credit experts name several factors that affect the profitability of early repayment:
- The term of the loan;
- The interest rate;
- Type of credit product;
- The scheme of calculation – differentiated or annuity;
- Additional fees – commissions, insurance and fines.
Of these, the most significant is the calculation of the minimum payment. Its essence is what part of the loan the borrower pays back in the first place. With an annuity, most of the payment in the first months (years) goes to the interest rate of the bank, and a minimum of the money goes to repay the principal debt. By the end of the payments the structure of the tranches changes: most of the money begins to go to the loans, and the rest to the rate.
With a differentiated scheme, the borrower immediately begins to pay back the debt in equal installments, and interest is generated from the balance of the debt. What to consider in this regard:
- Early full or partial repayment of debt is always beneficial – with any payment scheme. Although a differentiated loan is considered more “fair” for the borrower, it is important to consider all of the terms and conditions: the amount, term, and rate.
- You can calculate the profitability of early repayment when you visit the bank or on your own by using credit calculators. These programs work online, making new schedules and helping to determine the size of payments.
- The loan should not be repaid in full at the beginning of the term: for the bank this means the loss of interest accrued for the entire (usually – a long) period of credit. It is better to repay the debt a few months ahead of schedule, otherwise you will be put on the “gray list.
- Repaying your debt as early as possible is a strategy that doesn’t work in a crisis. In an effort to pay off the bank and give the last of it, the borrower may face a shortage of funds again.
- Early repayment is more profitable, the bigger and longer is the loan taken. Thus, mortgage borrowers will save the most, who with the repayment of the debt will be relieved of the heavy burden of payments, as well as get to own real estate.