Should you pay off a debt early? – increasing clarity in the early repayment of the loan
In recent years there have been some interesting innovations for the benefit of consumers, who have revised the regulation of the financing sector with interventions also aimed at increasing clarity in the early repayment of the loan. This especially in view of the repayment of the unused insurance connected to the loan (such as in the case of the transfer of the fifth).
What is it about?
The early repayment of a loan can be a very useful solution in all cases in which the person who has requested a certain sum from a bank or a financial company decides to pay the remaining amount (only in principal, without interest) in advance, thus avoiding future installments. However, is this a zero-cost operation or does it have penalties? Let’s find out together.
When to do it?
There can always be situations in which the applicant for a personal or finalized loan has new liquidity and the possibility, therefore, to reduce the installments and to pay off all the remaining debt. A possibility that can allow both to pay off a mortgage and a loan which in turn can be disbursed indifferently by Government Agency (and other public bodies), by a bank or by a financial company (since the lender does not affect the itself).
This operation is the early repayment of the loan (guaranteed by art. 40 of the Consolidated Banking Act) and can also occur when those who take advantage of the loan have in the meantime found another at more advantageous interest rates, therefore extinguishing the old one thanks to the sum obtained from the new one.
In this context, however, a distinction must be made according to whether it is a mortgage, a transfer of the fifth or a normal personal loan. In the case of mortgages, in fact, there will be a replacement or subrogation, in the case of the transfer of the fifth, the “renewal” while the actual extinction with the ignition of a new loan will take place in the hypothesis of a personal loan.
In which cases can it be convenient?
It goes without saying that the cases in which the early repayment of a loan can be a convenient choice, occur if there are still several years to its natural end. This is because you would avoid paying interest accrued over a longer period of time. The presence of ancillary and insurance costs must always be considered, but generally due to the French amortization, the higher the capital to be repaid (therefore from the beginning of the loan up to a little more than its half repaid) and greater it will be the savings on the interest amount to be returned.
With this in mind, if you have two loans and you have to decide which one is the most convenient to pay off early, at the same rate, you should prefer the one with the longest residual term. Having said that, to make a more precise calculation it is possible to use one of the special online tools. The calculators on the web are normally provided by independent sites, are free of charge and do not even require registration.
The commission on residual capital
Some annoyances can instead come from a clause found in some contracts of some personal loans (it must be said that many others do not provide it, so it is good to read carefully everything we sign) that remind a little of the penalty to be paid early termination of the assignment of the fifth (see also Early termination assignment of the fifth).
Here too, in fact, banks protect themselves from the “damage” caused to them by those who pay in advance, since they do not allow banks to enjoy the accrued interest. Thus, in such circumstances, a commission on the residual capital has to be paid.
The latter can for example be equal to 1% if the amount remaining to be repaid exceeds 10,000 euros and it takes more than 12 months to expire the loan. If, on the other hand, less than 12 months are missing, the commission could be around 0.50%, while if the residual debt is less than 10,000 euros, no commission may be expected.
Other banks, on the other hand, establish in advance that the early repayment of the loan will not be possible before 18 months have elapsed since the loan was granted.
So in summary, if you intend to apply for a loan from a financial company, such as Agos, and Findomestic, or from a bank such as Compass or Santander, or from any other bank, in addition to the convenience of the rate immediately, you must also consider how much will have to pay if you already intend to pay off the loan in advance, perhaps pending the arrival of some more or less budgeted liquidity.
Any other expenses
We have seen that those who wish to pay off a loan in advance sometimes find themselves paying a commission on the residual capital.
To this could be added the extinction accounts, which provide for the payment of an additional amount, to be added, possibly, to the so-called “daily diets”, ie the accumulation of interest due in a period of time ranging from the payment of the last installment until the early repayment of the loan.
For more information and to know all the details on this possibility, consult the Banking Consolidation Act, available on the Bank of Italy website.
As mentioned at the beginning of the article in May 2010, Best Bank intervened introducing the right of the borrower or financed to obtain in the event of early repayment of the loan reimbursement of the related insurance premiums already paid but not enjoyed. In the same ‘intervention’ it is specified that the bank must not be obliged to remind the person making the early repayment that there are unused insurance premiums but it is the same funded that has to be concerned for the return of the premium.
In fact, even if for contracts stipulated after the news of 2010, there must be an indication not only of the possibility of obtaining the reimbursement of unused premiums but also of how these amounts are to be calculated, it may happen that the bank does not autonomous to their supply.
Obviously, even for contracts stipulated before 2010, when there was no obligation to provide information on the calculations and reimbursements of insurance premiums, the right to reimbursement does not lapse. The method of calculation will be made proportionally between the residual duration of the amortization plan and the total premium: if the amortization plan is about half, then the reimbursed premium will be about half, etc.