Convenience early repayment financing
The main reason for choosing to pay off loans early is the possibility of saving the costs and interest that will accrue from the day of extinction onwards.
With the early repayment of the loan you will go in fact to repay in a single solution the capital that you still have to repay to the bank , and you will no longer be forced to pay the interest charged on each installment .
The savings on the interest that would accrue from the time of extinction to the natural expiry of the repayment schedule is often very significant and, depending on the amount of your debt, could amount to several thousand euros. Not bad, right?
How much does it cost to pay off a loan first?
According to the art. 40, paragraph 1 of the Consolidated Banking Act, you can pay off your debt, even partially, at any time.
However, the Consolidated Banking Act does not clarify how such an operation can cost you and, with the exception of new home loans (for which there is no penalty), the creditor could effectively impose penalties. But how much do they have?
The cost of early repayment of the loan depends on the amount you wish to repay and from the time the contract expires. Let’s do some clarity:
- if you have a residual debt equal to or less than 10,000 euros , you can pay off the loan early, completely free of charge, and the bank will not be able to apply any penalty;
- if you have a residual debt that is higher than 10,000 euros, you can still pay off the loan at any time, but the bank can ask you for a penalty of up to 1% of the remaining debt. So, if you have a debt of 15,000 euros , the bank can ask you for a maximum penalty of 150 euros .
Beware, though. In the event that the loans are more than 10,000 euros , you can still have some discounts in the penalty:
- if at the end of the contract it lasts more than a year, the bank can always ask for a maximum penalty of 1% ;
- if at the end of the contract there is less than a year, the bank can ask for a maximum penalty of 0.5% .
In short, summing up: the bank may ask for a 1% penalty for the early repayment of the loan, but if the contract is less than one year old, the measure is reduced to 0.5%. If the debt you must pay is less than 10,000 euros , there is no penalty. Clear, right?
You might be interested in: Calculation of loan installment: how to make it with Excel / Fast loans online / Findomestic loans without paychecks 2016
As briefly mentioned in the preceding lines, you can choose not only to pay off the entire loan in advance, but also only a part of it. Traditionally, this is the case in which you have a good liquidity set aside, but insufficient to be able to completely extinguish the financing: you can still choose to reduce your debt in part. What’s happening?
Except for some rare exceptions (for which we advise you to discuss it directly with the bank or the financial institution of your reference), choosing to partially extinguish the residual debt will reduce proportionally the amount of the installment of your repayment program.
Therefore, the maturity of the debt will remain the same, but to undergo a change (of course, decreasing) will be the amount of monthly payments.
Let’s take an example to clarify what we have mentioned above. If you have a loan of 50 thousand euros, you are repaying the capital with monthly payments of installments for 500 euros, and you want to partially extinguish the debt for an amount of 10 thousand euros, you will have to pay 80% of the loan (ie, 40 thousand euros for 50 thousand euros).
In other words, in the example above you will go to extinguish 20% of the loan, and the installment will be reduced by the same proportion, going from 500 euros to 400 euros.
As mentioned, however, the above does not always happen. In fact, some banks or financial institutions will give you the opportunity to keep the installment intact, reducing the duration of your loan proportionately .
What does not change is, intuitively, the advantage that you will be able to obtain: by partially breaking down the capital to be repaid you will be able to take advantage of a discount on the interest you will have to pay.
How to request early repayment
Requesting early repayment of debt is very simple. In fact, it will be enough to prepare a communication to send to your creditor, indicating the number of financing , the desire to completely pay off the debt (or the amount of the partial extinction) and the eventual date on which you want the transaction to take place.
Once the communication of the intention to early repayment of the debt is received, the bank will be able to make the calculations to be able to “book” the closing of the loan on the date chosen by you or, in case of absence of an express date, on the day closer.
However, this is not a very complex procedure: considering that today all the loans are managed by computerized procedures, it is often possible to pay off the debt on the same day in which you feel you want to proceed with this operation, or the following day.
The extinction of the remaining debt will usually be debited from your bank account . If not, you can request a count from the bank, and make a bank transfer with the currency of the date the loan is canceled.
Communication early repayment financing
Finally we close with a little advice that we suggest you keep in mind. The bank is always obliged to give you a document certifying that the residual debt has expired .
Often, however, especially in the cases in which you choose to extinguish the loan “at a distance” (by bank transfer or other instrument) the document of termination of the debt may not be provided in real time.
Always remember to request it, as it will be useful on several occasions and, among other things, also to demonstrate the effective extinction of the debt in the hypothesis in which you are requesting a new loan, and in the Central Credit still exist in question.
The data in CR are not updated in real time, and show the document of extinction of the debt will be a valid pass to overcome any obstacles.
Example of Early Redemption Calculation Financing
At January 31 we have a debt of 20,000 euros and on 10 February we intend to pay the extinction at a rate of interest of 5% with a penalty of 1%.
Remaining capital 20,000 euros + 1% penalty 200 euros (1% of 20,000) + 27.40 euros daily diems [20000 (residual capital) x 10 (days) x 0.0137% (daily interest rate)] = 20227.40 euros
Summarizing the calculation of extinction is as follows:
- 20,000 Residual capital +
- 200 Penal +
- 27.40 Daily Dietmes =