Special payments outside the agreed repayment schedule are referred to as early repayment. By repaying a loan early, one can either reduce the monthly burden or shorten the term of the loan. This article explains when and how this is possible and what costs you can expect to incur.
The most important facts in brief
- If a borrower repays more than the contractually agreed installments, this is referred to as unscheduled repayments.
- Repaying a loan early can mean that you pay more than required or that you repay the entire outstanding balance and thus terminate the loan agreement.
- In housing loans, there is a difference between fixed and variable interest rates.
- Variable-rate loans can be repaid at any time and in any amount without charges.
- In the case of fixed-rate loans, unscheduled repayments of up to € 10 are permitted.000 per year free of charge possible.
What does "early repayment of a loan" mean??
When taking out a loan, the borrower receives a repayment schedule. As a rule, this provides for a monthly fixed payment. This amount can vary due to fluctuations in the current interest rate. However, if the debtor pays in further one-off amounts independently of these payments, these are unscheduled repayments.
It is said that he repays the loan early. This can mean, on the one hand, that he simply pays a certain additional amount or that he repays the entire outstanding loan amount early, which results in the termination of the loan.
Differences between consumer and home loans:
A consumer loan is characterized by a low debt (usually up to a maximum of 50.000 euros) and short term from.
Whereas the housing loan has large amounts and a long term. Therefore, other standards are set by law, as far as early repayment is concerned.
With a consumer loan, an unscheduled repayment is always possible, there are no restrictions here. Also, the bank may not charge any fees for it.
Repay home loan early:
Every borrower may repay as much as he or she likes at any time. However, in the case of fixed-rate loans or home loans with a long term, which are still in the fixed-rate period, caution is advised with regard to the charges! Before making any hasty unscheduled repayments, it is advisable to read the loan agreement again and study in detail the extent to which early repayments are possible.
Unscheduled repayments for fixed-interest loans
The following is regulated by law: In the case of fixed-rate loans, an annual unscheduled repayment of 10.000 euros may be possible free of charge. But this does not mean that every borrower is also limited to it. For everything above, is a matter of negotiation. It is similar with the occurring expenses. One speaks of the so-called prepayment penalty and this may amount to a maximum of 1% of the unscheduled repayment.
With a remaining term of less than one year, these charges still amount to a maximum of 0.5. However, these are legal maximum values, which can also be lower due to accommodating credit agreements. Therefore, every borrower should first read the loan agreement before making a planned unscheduled repayment.
Unscheduled repayments for variable-rate loans
In the case of a loan with variable interest rates, the possibility of early repayment is quite different. Because here a special repayment is possible at any time and in any height completely free of charge. As a borrower, you can simply transfer additional money to the loan account. Also a credit notice by full repayment does not entail further expenses.
The right form of credit
Especially with higher unscheduled repayments, the prepayment penalty can be expensive. It is therefore worth considering whether you want to make early repayments or whether this is out of the question when you take out the loan. Households, whose budget would allow a higher burden than the loan installment would make, often have the desire to repay more. For such cases a variable interest loan is recommended. At the very least, you should try to negotiate good conditions for early repayments before signing the contract.
Attention for older loans
The above-mentioned fee ceilings of 1% and 0.5% respectively refer exclusively to loans taken out after the 10. June 2010 were concluded. For all older financing this law does not apply. That is, it must be read from case to case in the loan agreement, what early repayment fees arise. In part, these are significantly higher amounts.
How to repay early?
From the handling point of view it is quite simple, you simply transfer the amount X in addition to your monthly installments to the credit account. However, you should consult your advisor in advance and make it known that you plan to make a special repayment. Of course, it is not necessary to announce that you want to repay an overdraft facility.
This has no fixed term anyway and is reflected by a minus on our account. So the repayment simply means to cover the account accordingly.
How early repayment affects the borrower?
This should also be clarified in advance. There are in fact two ways in which banks deal with unscheduled repayments.
- The monthly installment is reduced
- The term will be shorter.
Those who have preferences in this regard should discuss them with their bank advisor and see if their wishes can be implemented accordingly.
Longest possible term and unscheduled repayments
Due to the possibility of unscheduled repayments, it is advisable to choose the longest possible term for housing finance. This has the advantage that the monthly burden remains low. This makes sense not only for households with a tight budget. Also those, which could afford more, should rather set on a low credit rate.
This means you are on the safe side if life circumstances develop differently than expected. The possibility of unscheduled repayments also allows the term to be shortened again, as mentioned above. Provided that one has negotiated this accordingly at the conclusion of the contract.
Repaying a loan early in a period of low interest rates
Due to the current interest rates, borrowers naturally ask themselves whether it makes sense at all to repay the loan early or to make unscheduled repayments. There is no general answer to this question, as it depends on the circumstances surrounding the loan.
How else would the available money be used??
Because the low interest rates are not only applied to loans. They also require that the money in the savings account is continuously reduced. Inflation averages 2%, and no savings interest rate can keep up with that. Thus, the repayment of the loan could be attractive again, as the monthly burden decreases. This brings a higher liquidity.
In addition, there is also at any time the possibility that the prime rate rises again. With early repayments you can prevent this risk.
SUMMARY:
Repaying a loan early – the right way to do it:
Every borrower has the option of repaying a loan early. Unscheduled repayments can be out-of-pocket payments or repayment of the outstanding balance, which means that the loan is terminated. Early repayment of a consumer loan must always be free of charges.
In the case of home loans, additional repayment is also possible, only in the case of fixed-rate loans, this can be done from an amount greater than 10.000 euros per year will lead to an early repayment penalty. This is limited by law at 1% of the amount repaid early. It is worthwhile to negotiate this with the bank when taking out a loan.
The unscheduled repayment can either shorten the term or reduce the monthly installments.