Christmas bonus, an unexpected inheritance, or a salary increase. All this, and more, can help a borrower prematurely repay a loan, or at least partially. The bank escapes by the early repayment of the loan, of course, an already calculated profit. These profits, which have been lost through special repayment, can be reduced by the banks with a penalty, the so-called prepayment penalty. What you should consider if you want to repay your loan early and how you can do it explains this guide to early loan repayment. See http://crossbowusa.com
A good installment loan makes a special repayment possible at least once a year, without incurring costs for the borrower. In the early redemption of a loan must be distinguished between a conventional installment loan, and a mortgage loan. For both, different requirements apply from the legislator, and there are differences in the early repayment penalty. For borrowers, the calculation of prepayment penalty is often incomprehensible. According to consumer advocates, there should be a rate of over 90 percent in the recalculation in favor of the borrower.
Replacing credit early – there are two options
There are two different ways to replace a loan early. One is the fact that somewhere enough money has come to replace the loan. This can be, for example, an inheritance sufficient to replace the loan prematurely. It is best to call the bank that gave you the loan and ask what the exact schedule for early redemption is and what the potential prepayment penalty will be. You can then transfer the current transfer fee to the account that the responsible employee of the bank names you, and the credit is deducted.
Option two is a premature redemption through a new loan. This can be financially rewarding if you pay significantly higher interest on your old loan than is now common practice. This is happily done when a low interest rate phase is reached and a legacy loan is still closed in a high yielding phase. The first step to a cheaper loan is an online loan comparison. If you have found a new loan with low interest rates over it, with which you can replace your previous loan financially rewarding, the next step may follow. In addition you give the new offerer a written power of attorney, that it can carry out the premature repayment of the credit for you. The power of attorney is usually included directly in the credit agreement, and does not have to be formulated by you. The new loan provider then takes all the important steps, carries out the necessary formalities, and replaces your previous loan for you. Important: the new provider requires the important data of the old loan, such as credit provider, contract number and the original loan amount.
If you want to replace a car loan, in which the vehicle registration was deposited as collateral for the loan, this will be sent to you after the loan has been paid by post. If the car loan is replaced by a new loan, the new loan provider receives the car letter from the previous lending bank.
1. Redeem the loan early – what you need to know
Depending on the type of loan, the calculation of the prepayment penalty can be very different. If the loan is repaid prematurely during mortgage lending, the prepayment penalty is calculated using a complex calculation. The basis of this calculation are different approaches. The aim of the lending bank is to minimize the financial loss that you incur as a result of the premature repayment of the financing. A personal consultation is often the best way to work with the bank employee to find out which is the best way for you as a borrower. Another possibility: a telephone consultation with a potential new provider, through the financing of the previous loan is replaced. Incidentally, the briefing and the written proof of the amount of the prepayment penalty are free of charge.
Since the calculation of costs in the prepayment penalty for mortgage lending for laymen is not comprehensible, if possible, a consumer advice should be included in the event of premature repayment of a mortgage loan. This allows countersignance compensation to be offset by their experts, often followed by a correction by the lending banks.
Exempted are property loans with a term of more than ten years. At the end of the tenth year of the financing, borrowers have an extraordinary right of termination, without the bank being able to claim a prepayment penalty. This means that you can replace mortgage lending at any time with a new loan, without incurring any costs for you.
For installment loans, on the other hand, the calculation of prepayment penalties is also comprehensible for laymen. If the loan has a remaining term of less than one year, 0.5 percent of the remaining debt may be required as prepayment penalty. With a residual term of more than one year, a maximum of 1.0 percent of the loan debt may be calculated as prepayment penalty. This is important for an installment loan for free use, but also for a car loan. But one thing is also important: not everyone who wants to replace a loan early, must also pay this fine. This depends on what has been agreed in the loan agreement. Several banks are foregoing a prepayment penalty and are making special repayments and early repayments of non-penalty credits possible.
For borrowers, it is therefore important to calculate in advance whether it is worth the early repayment of the loan, or whether the costs are higher than the interest that could be saved. It is advisable to compare the interest rate advantage with the prepayment penalty and to see whether the advantage still prevails even after deduction of the penalty interest. Only if the interest advantage outweighs the penalty, it is worth the bottom line, an existing loan prematurely replaced by a new loan.
Almost all credit providers of installment loans now offer their customers the option to reduce the loan by a certain amount once or several times a year. These special repayments are then free, and worthwhile, for example, if the Christmas bonus is invested in a reduction of the remaining debt. Through our credit test, you can see directly what the underlying conditions are with the respective credit providers so that you can repay the loan early. This also applies if you want to arrange a premature replacement of your car loan.
Of course, the best installment loan is also the one that stands out in the early replacement. The winner in 2016, Norisbank, offers its borrowers the opportunity to redeem 50 percent of the previous year’s residual debt prematurely each year without having to pay a prepayment penalty.
Many banks now offer at least one, some even several free special repayments annually. However, a complete loan repayment usually costs fees in the form of the prepayment penalty. With the current credit test winner, you can pay off up to 50 percent of the current remaining debt every year, without having to pay a penalty. This gives borrowers the opportunity to repay their loan gradually. A bank even waives a prepayment penalty, if a loan is completely replaced before the end of the term. This also often depends on the responsible case officer, and his discretionary decision in matters of credit.
2. When does it make sense to replace a loan early?
For borrowers, there can be various reasons that make it worthwhile to prematurely replace an existing loan. A common reason is the achievement of a low-interest phase, and an existing loan with far higher interest rates. In this case, it can be financially beneficial to repatriate the old loan with a new, cheaper one. It is important to have the right time so that the greatest possible savings can be achieved. Periodically compare the offers in our Loans Test to see when the financially appropriate time for loan remittance is. By prematurely replacing an expensive loan with a new, cheaper loan, you can even save several hundred euros on the bottom line.
It may also make sense to combine several smaller loans into one big loan, thus rescheduling it. Check your existing loan agreements and calculate the interest you currently have to pay for your loans. Compare these interest rates with the lending rates of other providers, this is possible with an online loan comparison. If you have found a loan with more favorable conditions than before, you can tackle the debt restructuring. Especially for loans with high interest rates, such as the credit line, it may be advisable to obtain a different loan offer. For overdrafts, far higher interest rates are usually charged than is the case with normal installment loans. Decisive for you should be whether you drive through the replacement of the available credit financially better than continue to pay the interest on the loan.
Redeem Credit – The credit line
For financial reasons, it can be very useful to replace his credit line. This also applies and above all, if several current accounts are led with several credit facilities. Most banks charge very high interest rates for this type of loan. The reason: the credit line is a short-term loan that should only be used to temporarily bridge financial bottlenecks. Account holders who permanently use the dispensing system should definitely consider rescheduling. In the event of a transfer of an out-of-pocket loan, the borrower has nothing further to consider. A prepayment penalty is not due here because such loans have no specified term. All that is required is to have the open amount directed to your own checking account so that the posting control system is replaced. For the new loan provider can transfer the money directly to the current account, and the account is back to zero, or depending on the loan amount even in plus. You can then cancel your credit line, so that you do not use it again after that, and again high interest due.
Redeem Credit – Expensive Credit Card Debts
In Germany, more and more consumers are using credit cards where there is a flexible partial payment. While this is a practical matter, credit card transactions can be made without them becoming due in full by the next 1 at the latest. The disadvantage, however, is the very high interest rates that apply to credit cards with flexible repayment. This makes it possible to quickly fall into a debt trap, especially if the overview of the transactions carried out is lost. Interest rates of 15.00 percent pa and more are not uncommon in such credit cards with partial payment, but rather common. With a total of 5,000 euros of debt on such a credit card you have to pay about 750 euros in interest annually. This is even more expensive than the already expensive MRP interest.
If the open amount can not be repaid in the near future, rescheduling should be considered by means of an installment loan without earmarking. As a result, the expensive credit card debt can be replaced with a much cheaper credit. Our test winner, the norisbank, offers loans from 2.90 percent pa onwards. The debt repayment of credit card debts makes a lot of money financially. It is important not to reuse the then released credit line on your credit card again. Either cancel your credit card afterwards, or choose the full collection of weekly or monthly billing. Of course, you can choose a prepaid credit card that can only be used on a credit card basis. As a result, you always have your expenses in full view with the credit card!
3. When a premature redemption can be beneficial
If a period of low interest rates is around the corner, and you have real estate financing with a fixed interest rate, you may be eligible for premature loan repayment. A rescheduling can be useful even if you have a mortgage with a variable interest rate, and a high-yielding phase is reached. A premature repayment of the loan by rescheduling a new real estate loan can help save money. It makes sense to discuss the early repayment penalty even if you have the opportunity to repay your loan early due to an inheritance or increased income. Before you cancel your loan, be sure to seek advice so that you do not fall into a cost trap. Consumer centers are happy to help here, other credit providers also advise in this case.
To replace an installment loan prematurely is useful if the interest on the new loan is at least 1.00 percent pa cheaper than is the case with the previous loan provider. The higher the difference in interest rates between the previous loan and the new loan, the higher the savings that premature redemption entails.
4. When the prepayment penalty does not have to be paid
If you have a loan agreement that has been agreed with variable interest, you have the right to terminate the contract by law with three months’ notice. However, in practice this is not often the case that borrowers have a loan with a variable interest rate. This is more common in Britain and other Anglo-Saxon countries. If you have a loan with fixed interest, this rule does not apply. For contracts in which a fixed interest period of more than ten years has been agreed, you have the right of extraordinary termination in the tenth year. In this case, no prepayment penalty must be paid. If you want to redeem your car loan ahead of time, you should carry out a review of the interest rate commitment. However, financing for ten years is unlikely when buying a car.
In the past, many banks were subject to a major error in the cancellation policy in the loan agreements. In the loan agreement, the borrowers must be informed about their right of withdrawal. Within 14 days, you can revoke a concluded credit agreement. This is intended to help protect a borrower from hasty decisions. Check your previous credit agreements to see if the cancellation policy has been correctly completed. Otherwise, under certain circumstances, you may receive back your already paid prepayment penalty, or you may not be required to pay the Bank a penalty on termination of the loan agreement.
5. Conclusion: replace one loan early
The premature repayment of a loan can cause high costs. In conventional installment loans, even laymen can understand the costs incurred in the form of prepayment penalty, and even calculate. However, if you are rescheduling, and may even want to redeem multiple loans ahead of time, you may be able to save a lot of money by moving to the right provider. With our current credit test winner, the norisbank, you get loans from an effective annual interest rate of only 2.90 percent.
Anyone who wants to repay the loan premature on a real estate loan must expect a prepayment penalty, which has to be paid to the bank. This can be very expensive for the borrower. However, mortgage lending with a variable interest rate may be terminated at any time with a notice period of three months. For real estate financing with a term of more than ten years, these can usually be terminated at the end of the 10th year, without having to pay for early redemption of the financing of a prepayment penalty.
Even if a prepayment penalty has to be paid, the loan repayment can still be worthwhile. This is the case when mortgage lending has been completed during a high yielding period, but the current low yielding phase makes far lower interest rates possible. In any case, the cost and the potential savings should be checked before the loan is terminated!