Suppose you had taken a loan of 30,000 euros from the bank to renovate your house. After a few years, the balance of the loan has decreased significantly and since you happen to have some money on the side during this period, you are thinking of proceeding with an early repayment of your loan to... get this obligation out of your head.
The same goes for the mortgage you took out when you bought your home, which at some point you may want to and can pay off early.
So reasonable questions arise:
Is it convenient to pay off the loan earlier than it expires? Will you save interest and/or principal? Is there a possibility that the bank will give a discount on early repayment? What does such a move serve you?
Do I have the right to make an early loan repayment?
The borrower's right to early repayment of the loan is legally enshrined in national and EU law.
In this context, banks give you the possibility to repay your loan at any time, either in full (full repayment) or in part (partial repayment), without a prepayment penalty.
Is there a discount for early loan repayment?
About. In general, paying off a loan early is always beneficial, because you certainly avoid some interest which is essentially the "discount" that the bank gives you.
However, we should make it clear that, for better or for worse, banks make discounts very difficult, and certainly not on capital.
This happens because in order to reduce the balance of the loan capital that you will repay, a bank must take a provision or in other words write a loss for the amount that will be written off. So don't expect miracles.
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In which cases is there a "discount" on the principal of the loan?
If you have heard about write-offs of a large or small part of the loan, they concern cases of non-performing loans that have become completely problematic. That is, they are in permanent arrears and the bank has exhausted all avenues to recover the capital through coercive means, such as seizure and auction.
After all, what do I gain with early loan repayment?
As we said, early loan repayment does not mean a discount on the capital. But in any case, early repayment is beneficial for several reasons:
#1 You save money on interest
You are exempt from the remaining interest. The amount of each installment you pay consists of two parts:
- One part corresponds to capital
- The other part corresponds to interest
But the balance you see in the loan account only concerns the capital.
You can calculate the amount you save by multiplying the installments remaining until the total repayment of the loan by the amount of interest you pay in each installment (you can find this information either in your bank's web banking or in the tariff that has been given to you ).
❗ At the beginning of the loan, most of the installment is interest and the least capital. Over time, the principal portion grows and the interest portion decreases. Since the bank will not give you a discount on the capital during early repayment, but on the interest, you are clear that the faster you pay it off, the more interest you will save.
#2 You improve your credit
You can still borrow if the need arises and without particular problems, since early repayment is a positive element of your overall transactional behavior.
The bank may not have collected all the interest and therefore your case was not the most profitable, but you paid normally. When a bank checks your credit rating, you definitely earn points if you have previously paid off a loan without delay.
#3 You make the household budget lighter
You take out an expense that tends to become "fixed" and thus you can make your personal or family budget much more efficiently.
After you pay off the loan, the amount you would pay each month for the installment essentially becomes additional income. Combined with the interest you save, the financial benefit is significant.
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#4 You have peace of mind
In the case of a mortgage you win... your house. For as many years as the mortgage lasts, your house is mortgaged. In essence, it belongs to the bank, since in the inevitable event that you find yourself in a difficult moment, it is possible that the bank will proceed with seizure and auction.
Therefore, early repayment of the loan is in your favor, as the mortgage is removed and the house will now be yours without any encumbrance.
Fun fact!
In the past, banks not only did not give a discount, but charged a penalty for early loan repayment, since in essence this means that they "lose" interest that they had calculated that they would collect.
Today there is no early repayment penalty, therefore early repayment is advantageous, since you can pay off your loan at any time without any charge.
Now you know what applies to early loan repayment and how you can benefit from it at a discount! If you want to know more about mortgages or consumer loans , we are here.
On our platform you can be informed and compare free loans from all major banks. And when you are ready, you proceed with the banking product that suits you!
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