Mortgage repayment can take up to 30-35 years. In the case of cash loans, this time is shorter – depending on the amount of debt, it ranges from several months to several years. Regardless of what kind of commitment we have chosen, we can seek repayment ahead of time. The main benefit of such a solution is even a reduction in the amount of interest paid – but how much we can save depends on many factors. experts answer three questions about early repayment.
A loan for several years is a serious commitment – it affects our financial condition and the ability to take advantage of other banking products. Most often it limits them a bit – we may have a problem with the purchase of expensive equipment in installments, for example. Therefore, if we receive a sudden injection of cash or simply manage to postpone some savings, we are eager to settle the debt.
Before making a decision, e.g. to pay your mortgage before the deadline, it is worth considering the pros and cons of this choice. Earlier repayment of liabilities is guaranteed by the Consumer Credit Act, and more specifically by Art. 48.1 of this Act, which clearly states that the consumer has the right to repay all or part of the obligation before the end of the contract. In addition, the lender is required to provide information on any costs arising from this title.
Banks earn on the interest rate on the loan and the margin it contains, which often increases with the repayment of each subsequent installment, which is why they use a commission for early repayment of a cash loan or other liability. It is not surprising that financial institutions are trying to protect themselves against loss of remuneration arising from unprofitable from their point of view, repayment of the mortgage early.
Before making a decision, it’s a good idea to look into your contract and see what the relationship between early loan repayment and interest looks like, and look at any additional costs that arise from early repayment. Earlier repayment of the mortgage can generate additional costs, which can amount to even a few percent of the overpaid sum. It all depends on the contract we have signed with the financial institution and the time of repayment.
– Sometimes the sum of the fees we pay will depend on the moment when we undertake the early repayment of the cash loan. In mortgage contracts, additional fees disappear, e.g. after the first three years of its duration. In other cases, the cost can only be charged on loans with a fixed value. If we are considering early repayment of the loan, it is worth to familiarize yourself with its terms before signing the contract.
Repaying your loan early can give us many benefits. One of them is definitely the money saved as a result of shorter interest accrual times. In addition, in many cases, after repayment of the loan, we are entitled to a refund of a proportional part of the fees previously incurred.
When determining the benefits of early repayment, the type of liability is significant. It should be remembered that the early repayment of the mortgage and the interest on which the bank earns is a relationship that is completely different from that of a high-interest cash loan.
One of the most important factors when calculating the amount we can save is the moment we make early repayments.
– The important issue is whether we decided on equal or decreasing installments. In the first case, part of the capital installment increases over time, so the later we repay the loans, the less benefits we will get thanks to overpayment – the sum of interest, which we avoid will decrease over time. On the other hand, as the table below shows, if we want to cancel early repayment, we will incur lower costs by choosing decreasing installments.
If you are sure of your decision to repay the liability earlier, it is worth contacting the financial institution that granted us the loan in advance and confirming the terms of such an operation. First of all, it gives us the opportunity to negotiate any fees, but above all we minimize the risk of misunderstanding.
– There are situations when early repayment or overpayment requires the signing of an annex to the contract. If we do not do this, the additional funds that we transfer to the account servicing our debt may be blocked – while the repayment terms will still be the same. The system will collect funds only when the next installment is due and the interest remains unchanged. This can lead to unnecessary misunderstanding.
Although we often want to get rid of the debt as soon as possible, the borrower should coolly recalculate whether early repayment will be profitable for him. The most important thing is to check the relationship between early repayment and interest. After analyzing your situation, you may find that the costs exceed a significant portion of the amount to be repaid. Then the debtor should consider an alternative solution, such as placing additional cash on another account and waiting for a better repayment moment.