Depending on the needs of the users, making an early repayment of the credit allows reducing the monthly installments or installments, so that the interest charged is less demanding. In the following article, we will explain the advantages and disadvantages of repaying a loan in advance.
What is the early repayment of a loan?
The repayment of a loan is the operation that consists of canceling part of the debt contracted with the banks. The amortization can be total or partial, depending on the strategy you use to return it. In both cases, one of the effects it will generate from its application is that you will drive greater savings in your personal accounts.
Among other reasons, because the interest generated will be lower when the term or the amount is reduced, provided that this operation is not neutralized by the early repayment commissions of the credit.
There is no single method for the early repayment of a loan. On the contrary, you can do it on two duly differentiated variables: either reducing the term or on the contrary the quota. Your choice will depend on the needs you have at that time and also the capital to be amortized.
Although there is one thing that you will surely notice from the application of this accounting operation. It is not another that you will see reduced the interests that apply to you from your bank. Not surprisingly, that is the main objective of amortization.
Of course, before checking if it is better to opt for a reduction of the monthly fee or on the contrary of the deadlines it will be necessary that you know that a loan repayment can not be made at the beginning. You must wait a few months or even years to implement it and it will depend fundamentally on the conditions of the contract. Each financial institution and credit line provide different terms that will be very useful for you to detect to see if you can avail yourself of the early repayment of the credit.
Early repayment of credit On-time or in installment?
So that you can base your decision more effectively it will be better to analyze this scenario on a practical example in which the purpose of the operation is reflected.
The most relevant alternatives are mainly to reduce the term and maintain the same monthly fee you have so far or opt for the reverse process, that is, continue with the same term of permanence and reduce monthly payments. Which of the two systems suits you?
Credit amortization with a decrease in the fee
A loan repayment with a decrease in the installment is made when you pay less money for the loan each month but the same maturity period is maintained. It is a valid option if you want to go more relief every month with the loan repayment.
In the event that you have been granted a credit of 10,000 dollars at 5 years with an interest of 10%, we will calculate the difference between amortization in installment or amortization in a term.
If you believe that your financial situation is more predisposed to the reduction of the quota, in this case, the strategy would be maintained with the same permanence but recalculating the monthly quota.
In this way, the monthly fee to be paid for the loan would fall from $ 212.47 to $ 191.22. At the end of the loan, you would return a total amount of $ 11,473. In practice, it means that you will reduce interest by 788 dollars.
Credit amortization maintaining the same installment and reducing term
In this case, when carrying out an early repayment of the credit, the same quota would be maintained but reducing the number of months to formalize the banking operation. If you choose to keep the quota (212.47 dollars), the calculations will indicate that you will face this payment for 53 months instead of the initial 60 months. As a result of this operation, the final loan charge will be 12,261 dollars.
Therefore, the most beneficial proposal to pay less money for the subscription of a loan would be the reduction of quota, in this specific example. To know if in your case it is more beneficial to repay the credit in installment or in advance, it is recommended to request the full repayment schedule from your bank and perform the relevant simulations.
Commissions for early repayment
Before choosing one or another strategy in the repayment of your loan you should know what the conditions of the contract are, you can be surprised that it carries a penalty for performing this operation.
It is the so-called early repayment commission and is limited in advance by the law. It cannot be exceeded from a stipulated percentage that will be 1% if the terms are longer than 12 months. For shorter periods of stay, they will be reduced to 0.50%.
Therefore, it will be completely necessary for you to throw out the calculator to verify the real difference between the savings of the early amortization and the payment of the commission for amortization. If the difference is negligible, you may conclude that it will not be worthwhile to carry out the repayment of your credit line.
In any case, the desirable scenario is that this commission is not included for which bank movement is more profitable and savings are higher. You will not have problems to satisfy this desire since the current bank offer incorporates credits without commission for early repayment.