Early Payday Loan Repayment: Notes on prepayment penalties

29 Jan

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Who owns a current loan or a loan, which he would like to repay prematurely and in a sum, should definitely pay attention to whether in connection with the planned replacement, a so-called “prepayment penalty” is incurred. In the context of consumer and consumer credit, early repayment is usually not a problem and free of charges such as prepayment penalties or similar.

Early payday loan repayment: Notes on prepayment penalty

However, this does not appear to be the same as for mortgage loans or loans with a collateral security. This is mainly due to the fact that it is common practice in mortgage lending for a certain period of time, so that accurate planning for borrowers and lenders. We are talking about so-called debit interest, which is the main reason for claiming prepayment penalties.

Why can a bank demand a prepayment penalty from the borrower?

In the case of loans and loans where the interest is fixed for a certain period of time and there is still a residual debt to be extended if the interest is tied up, the banks are planning a fixed interest income. Extraordinary repayments can be made free of charge and only in an agreed upon framework without the explicit consent of the respective bank. There is talk of a so-called “special repayment right”, which every borrower can negotiate with his bank at the beginning of the financing and integrate it into the loan agreement. Unscheduled repayments in excess of the agreed special repayment right are subject to approval and, as a rule, fees.

This is due to the fact that the bank has calculated fixed interest rates for the loan transaction and, of course, loses part of the projected interest income in the event of a large special repayment or even a complete loan repayment. Banks may, but need not, provide the client with an opportunity to repay the loan in full in advance. However, the amount of the outstanding residual debt increases by the sum of the prepayment penalty, which offsets the resulting interest loss for the bank. When calculating the prepayment penalty, there are major differences between banks. In some cases, due to goodwill, a bank may refrain from calculating a prepayment penalty, for example, in the event of death of the borrower.

In the current low-interest-rate phase, however, such a behavior is not to be expected since the interest margin between the previous and the current interest rate level is much too large. Accordingly, the bank can not re-lend the money it receives from the borrower unexpectedly early at the original interest rate. A loss is therefore inevitable, which is why the banks resort to the calculation of a prepayment penalty.

Termination option with a fixed interest period of more than 10 years

In order to prematurely repay a loan without prepayment penalty, there is only one more “backdoor” from the point of view of the borrower besides possible goodwill. This is related to the fact that in fixed interest rates, which run for more than 10 years, such as 15 years, the borrower after 10 years can make use of a special statutory right of termination. This special right of termination exists because of changes in the market that can not be foreseen for a consumer over a period of more than 10 years. Anyone who has committed interest rates for more than 10 years in the past can then repay his loan after 10 years at the latest, for example, by a new and lower-interest loan from another bank.



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