Do you have a loan in progress and need to pay it off early because you managed to find the necessary funds to pay off the debt? Paying off a personal loan is a right and in many cases it can be very beneficial as it will be possible to save a lot of interest.
What does it mean to pay off a loan?
To extinguish a loan means to close the loan in advance by paying the remaining amount in a single solution without having to pay the remaining monthly installments. By law you can access at any time the extinction of the loan is allowed. However, two factors must be kept in mind: first of all penalties are foreseen when a loan is extinguished in advance of its natural due date. Secondly, most of these transactions fall into the French amortization plan category. Consequently, the interest portion is higher in the initial period of the loan and decreases with the passage of time. Precisely for this reason there are times when early extinction is more advantageous.
When to opt for early repayment of a loan
Early repayment of the loan can be linked to two different reasons:
- have the liquidity necessary to close the contract;
- decide to replace the current loan with a more advantageous one. In this case the sum to repay the residual debt comes from another loan.
To find out how much the remaining debt is, just consult the loan statement. It should be borne in mind that, if you are dealing with a French amortization plan, it is not convenient to pay off the loan when you only have to pay a few installments. In fact, the interest rate is almost negligible. Instead you have a real convenience by making the early repayment in the initial period of the loan. Another aspect to consider concerns the penalties that can be applied by the credit institution as compensation for failure to pay interest. They are generally not expected when the residual debt does not exceed 10,000 USD.
Otherwise or if there is more than one year to the expiry of the contract, a penalty of up to 1% of the residual debt can be applied. In any case, this additional expense cannot exceed the amount of the residual interest. It is also possible for the debtor to take out specific CPI insurance on the loan (Credit Protection Insurance) when signing the loan agreement. This avoids any type of penalty. When the payment of the insurance policy takes place in a single solution, it is good that, before opting for the early repayment of the loan, the debtor checks whether the repayment of the unused premium can be reimbursed.
Partial or total extinction
If you want to pay off a loan early, you have two solutions. On the one hand, it is possible to repay the entire residual debt, on the other hand, we opt for partial repayment as we do not have the necessary liquidity to pay the entire remaining sum. The methods that can be adopted are:
- keep the duration of the loan constant by reducing the amount of the remaining installments;
- keep the monthly installments constant and decrease the loan term.
Remember that it is possible to pay off a loan early even when the transfer of the fifth is adopted. By law it can be done at any time, by paying the possible penalty and the residual debt amount. In this case, stamp duty and investigation costs are not refundable. In the event that this solution is envisaged by the contract signed, part of the bank commissions can be recovered. This type of loan requires life insurance and an explicit application must be submitted for a refund of the part of the unused premium.