Early repayment of the debt: is it convenient or not?

In the world of credit, fortunately, there are not only suffering and stranded loans, a great cause for recrimination for the banking system often referred to as the real reason for the tightening underway for years now. Sometimes, in fact, some of those who have resorted to a loan for the purchase of a product, are lucky enough to see their economic condition change for the better, perhaps thanks to a promotion in the workplace or due to the collection of a legacy.

Repayment of the loan

Repayment of the loan

In this case, the problem is therefore no longer to find the way to repay the monthly installments of the loan obtained previously, but to repay them in advance, so as to obtain a more or less substantial saving on the final balance. The way to take advantage of the propitious moment is the early repayment of the loan, which is usually obtained by paying the penalty that had been established when the contract was stipulated. A penalty that represents in practice the compensation to the bank or the finance company for the part of interest that will no longer be cashed, a sort of severance pay for the risk incurred in providing the loan.

The institute in question is regulated by the consumer credit reform that came into force in 2011. The new rules that came into force after that date establish in particular that if the debt that remains to be paid is below the threshold of 10 thousand USD, the company cannot claim penalties, whereas if it is above the quota in question it depends on the time remaining until the expiry date of the contract: if more than one year is left, the company can request compensation of up to 1% with respect to the remaining amount, while if there are less than twelve months, the penalty cannot exceed 0.5%. In any case, however, the indemnity due to the lending institution cannot go beyond the amount of interest missing at the expiry of the contract. It should also be remembered that in no case can the company that granted the loan deny the early repayment of the loan. Some institutes, however, prevent the early extinction from occurring before eighteen months have passed since the contract was signed.

Having established that there is a way to escape from a loan more favorably than the initial amortization plan agreed with the lender, it now remains to determine whether to take advantage of the opportunity is really convenient, or whether it is better to start thinking about alternative forms, such as the scrapping of the loan and its replacement with one that appears with more favorable conditions.

Loan advantages

Loan advantages

In this regard, the school of thought is quite unambiguous and sees the experts ready to point out that the first move can be agreed only if it is done when the funding has been recently granted. This apparent paradox derives from the fact that in our country the so-called “French-style” amortization is in force, in which the first installments consist mainly of interest. With the passage of time and as the debtor proceeds to repay the installments, the situation literally turns upside down and during the last period of the loan’s life, the share of interest on the installment becomes much lighter. Precisely for this reason, the early repayment of a loan is especially advantageous in the initial phase, resulting in savings on the share of interest, while having recourse to the terminal phase does not give great advantages, so much so that it would be better to renounce altogether and resign to pay according to the plan that had been agreed at first and, at least, regretted not having been able to intervene earlier.

As for the procedures that regulate the early repayment of the loan, they can vary from one institution to another. Usually the agreed procedures nevertheless change in an irrelevant manner and an ad hoc request by the customer is enough, which on his part must get the written analytical accounting issued of what is necessary to be able to carry out the operation. It should also be remembered that the same customer can in turn choose whether the early repayment must concern all the remaining amount or only a part of it. If the decision is made for a partial extinction, there are two possibilities for the customer: the first provides for a reduction in the loan while maintaining the same installment, while in the second case it is possible to opt for lowering the installment without going to retouch the duration.

Finally, one last important thing must be remembered: if during the stipulation of the contract it was decided to take out a Credit Protection Insurance (CPI) policy and to pay it in a single solution, before the final settlement of the loan it would be advisable to carefully inquire about the possibility of being able to to get back the part of the insurance premium which was not received.

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