Early repayment of the loan and its pros and cons

Early repayment of the loan and its pros and cons

June 15, 2019 0 By admin

One of the characteristics to be considered when selecting a loan is certainly the possibility of early repayment. If this option is offered by a bank or non-bank company, it is certainly quite a plus. But there is the other side of the coin. There are not only pros, but there are also pros. Let’s look at a summary of the positive and negative side of early repayment.

The loan will be favored

When a loan is repaid early, this is usually associated with a considerable advantage. That is quite understandable fact. This is primarily due to the fact that interest rates are regularly calculated on the basis of default. This means that if you lower it once to zero, no further interest will be calculated. After the total recalculation, it can be found that a quite interesting amount has been saved, which can be even in tens of thousands depending on the loan amount and interest. Or even much higher.

There is also the possibility of partial repayment

There is also the possibility of partial repayment

The second plus we look at is that there are also possibilities for so-called partial early repayment. This means that it is not necessary to reimburse the entire remaining amount as a lump sum, since only a certain amount can be paid. How big it is is up to you. It is therefore possible to send a higher amount on a regular basis or to throw something in installments. We have already described the reason for doing this above. There is a reduction in the principal and hence the overall advantage of the loan.

You will shorten the length of your commitment

You will shorten the length of your commitment

This is also a positive thing that cannot be forgotten. If we look at how long loans have been granted today, depending on the specific credit product, these may be:

  • Months
  • Years
  • Decades

In terms of months, the shortening is not so striking again – maybe shortening the loan by one month. For others it can be quite striking. There is nothing unusual that you will stop repaying even a few years earlier than specified in the contract. You will end the commitment sooner, easily removing a large burden from your loins. And how does this happen? Again, we are talking only that the principal to be paid is reduced. The lower it is, the fewer repayments will be needed in the future. In the case of long-term loans, each minor extraordinary installment can play a role.

You start with a clean shield

You start with a clean shield

This too is a big plus that early repayment of the loan can bring. Having a so-called clean shield is very good for him in that he does not have to deal with any obligations, just as he has a better bargaining position if he is interested in another loan. Both because he currently has no obligation and, of course, because the previous one has paid off without any problems, which makes him or her an ideal client.

So much for the main benefits of early repayment of the loan. However, it is not possible to neglect possible negatives. What are they? Here is their main list.

Early repayment of the loan may be subject to a charge

Early repayment of the loan may be subject to a charge

Be very careful about this. Before you decide to make an early repayment of the loan, it is advisable to find out whether this option is charged. In the past, this was quite common, while it is now increasingly being abandoned. On the other hand, there are many possibilities in the credit market, so it is good to be in the picture at all times. Possible payments can be divided into three types, namely:

  • Fixed amount
  • Percentage amount
  • Combination of both

As a result, you may benefit from early repayment of the loan, but this may not be as significant as you might expect due to the potential charge. The advantage can thus be indeed negligible.

The amount may be limited

This is often the case with mortgage loans. For them, the conditions are set slightly differently than in the case of a classic loan. So there is nothing extraordinary that the amount you want to pay may be limited. Usually it is talked about a quarter of the principal, always once a year. Even if you have the money, you have to keep it, because there is no easy way to terminate the existing larger loan – that is, if you do not mind the possible penalties associated with it. By limiting the maximum amount, if you don’t want to risk sanctions, you can repay the loan only after a few years, not immediately. And that can be a big problem.

Only certain terms are given

It is not always possible to send an extraordinary installment on the date you want. When we look at what is standard for some loans, primarily for mortgages again, it is nothing more than the need to send money extraordinarily only at certain times. For example, once a year. Here, too, we come to the fact that it is quite a very restrictive requirement, which is connected with the fact that many people quite logically and rightly view it as a possible negative.

You may be missing money

You may be missing money

While it is good to delete a commitment as soon as possible, the other side of the matter should also be taken into account. Such that it is appropriate to create financial reserves. In practice, this means nothing more than trying to have some money with you. If you spend them all on early repayment, you find yourself without a commitment, but if you subsequently need tens of thousands or other amounts, you will not have them. And your only starting point will be the loan, which you will have to apply again. And at the risk of not being approved or associated with more interest than in the previous case.