Everyone has the right to early repayment of consumer and mortgage loans. Does this solution always pay off? If you have such an opportunity, it is worth analyzing it in detail and making a reasonable decision Repayment of the loan before the deadline is unfortunately not always beneficial for your wallet. for the borrower. So when does it pay off and when should such a decision be made?
Is it possible to pay back the loan earlier?
According to the Office of Competition and Consumer Protection, every person has the right to repay the loan earlier, before the expiry of the last payment included in the contract.
However, banks do not always favor such a solution and that is why it often happens that you do not save as much as you would count on. In addition, the terms of early repayment of the loan obligation are regulated by the Anti-usury Act. There are a few rules to keep in mind so that this operation is really beneficial for you.
Are there any early repayment costs? Margin, bank commission, and other additional fees.
The bank is an institution that earns money by granting loans to individual and business clients. Therefore, if you pay your liability in advance, you must consider all the costs associated with it. These include not only outstanding capital but also the amount of accrued interest and other types of additional fees and commissions.
One of the costs to keep in mind is the bank’s margin, which increases as the loan repayment period expires.
Early repayment commission
The contract often has a provision that protects the lender from losing this money, talking about a commission on early repayment (compensation commission). It varies depending on the type of contract, the bank and the general conditions for granting the loan, and usually ranges from 1% to 3% of the capital.
It is therefore worth analyzing the costs associated with this additional fee and compares them with the outstanding interest amount.
If it turns out to be lower, early repayment pays you the most. Some banks exempt their clients from paying a compensation commission after a period of time specified in the contract has elapsed, this may be a year or several years, as in the case of mortgage loans. In such cases, having the option to pay back the capital will make the decision for you.
Overpayment of monthly loan installment. How will the bank settle it?
It is worth remembering the provisions in official acts, namely in the opinion of the President of the bank should reduce (including the period from the date of actual repayment to the date of final repayment) all fees, commissions, and costs, as well as return them to the customer.
This is the official position, from which any deviation is treated as a violation of the law. Banks are often reluctant to provide such returns, which is why the consumer’s knowledge of the regulations is an added advantage for him. One of the solutions for early repayment of the loan, both consumer and mortgage, is its overpayment, i.e. the repayment of an amount higher than the monthly installment. The bank can settle this in two ways:
- shortens the loan period (the value of monthly installments remains unchanged),
- will reduce the value of monthly installments (the loan period remains unchanged).
Is it worth paying off your mortgage early?
The above rules also apply to the early repayment of a mortgage. The benefits of this are unambiguous, but you should also carefully analyze all the pros and cons associated with it. The time when the bank may request an additional compensation commission, as well as its percentage value, depending on the terms of the contract. As a rule, however, this is a consumer-friendly operation.
Early repayment of the loan can bring great benefits, not only financial but also psychological and emotional. When you have such opportunities, it is always worth considering such a solution. However, you should remember to analyze all costs, including those not always obvious to you as a consumer.
For the borrower, early repayment of the loan is beneficial in the first repayment period, when in most cases the repaid installment mainly covers interest and only a small amount of capital. Banking law guarantees the possibility of such repayment of consumer loans with a value below USD 80,000.