Loan Redemption – Loan or cancel early

Premature loan repayment means the termination of an existing loan agreement by mutual agreement of both contracting parties, with immediate payment of the outstanding loan debt. The loan agreement specifies whether early loan repayment is even possible. Usually, a blocking period of a few months must be observed before the loan can be repaid or canceled.

Motives for early loan repayment

Motives for early loan repayment

Since between 6 and 10% interest is generally payable on a loan, it always makes sense to only borrow money from the bank if it is absolutely necessary. Conversely, you should always try to pay off an existing loan as soon as possible. When concluding the loan agreement, this is taken into account by setting the installments and the term.

If something changes in your personal financial situation, for example due to an unexpected inheritance, the payment of an insurance or a new, better paid job, you should use this additional capital to replace the existing loan. This not only saves interest costs, but also lowers the monthly burden by eliminating the credit installments.

Another reason can be a sudden phase of low interest rates. This can especially be the case with long-term loans, such as a real estate loan. If the loan is taken out, this happens at the current interest rate level. If this drops significantly during the term of the loan, it may be worth taking out a new loan at the lower interest rate in order to replace the existing loan.

example calculation

existing loan new loan
  • Remaining credit: 10,000 USD
  • Remaining term: 36 months
  • Effective interest rate pa: 8.99%
  • Monthly rate: 316.32 USD
  • Interest costs: 1,387.52 USD
  • Credit line: 10,000 USD
  • Duration: 36 months
  • Effective interest rate pa: 5.99%
  • Monthly rate: 303.46 USD
  • Interest costs: 924.56 USD

The saving is 462.96 USD compared to the existing loan.

A similar calculation can be made if, for example, the fixed interest period for a loan has expired and the interest rate is renegotiated.

Converting loan interest from variable to fixed can also be worthwhile. Especially when the interest rate fluctuates strongly or you simply personally estimate the security of constant credit rates. However, it should be noted that the longer interest rates are fixed, the higher the interest rates.

Debt rescheduling

Debt rescheduling

Debt restructuring allows several small loans, including the expensive overdraft facility, to be combined into a new, large loan. This is particularly worthwhile if the interest rate for the new loan is lower than the interest rate for the old loan, but it also serves to make things clearer. Instead of many small installments, only a monthly installment is due, making financial planning much easier.

Revocation of the existing loan agreement

Revocation of the existing loan agreement

After the conclusion of a loan contract, the borrower can withdraw from the contract within a two-week period, ie revoke the contract. This right of withdrawal, which is applicable to all credit agreements concluded within the EU, results from the German Civil Code (BGB), in particular the chapter “Special provisions for consumer loan agreements” (§§ 491 – 505).

The revocation period begins from the time of becoming aware of the revocation instruction, which for this purpose is clearly legible on the credit agreements directly above the signature field. This means that the banks are complying with their instructions.

If the borrower can prove a lack of cancellation policy, he is legally required to withdraw from the credit contract up to six months after the loan agreement has been concluded. The loan amount paid out must then be repaid immediately.

The revocation must be made in writing and must be received by the lending bank within the period. The date of the postmark is decisive for this. An explicit reason does not have to be given, but the intention to withdraw must be clear from the document (example: “I hereby revoke the loan contract concluded with you on … with the contract number … on time.”).

Termination of an existing loan

Termination of an existing loan

In principle, all types of loans can be canceled by the borrower. However, there are specific deadlines to be observed, which are the minimum that must be observed by the consumer. Contractually agreed regulations that are more favorable for the consumer have priority.

Fixed interest rate

If the loan is an installment loan with a fixed interest rate, it can be terminated by the borrower after a six-month period after receipt of the loan amount with a notice period of three months (see $ 489 (1) BGB).

Variable interest rate

If the loan is a loan with a variable interest rate during the term of the loan, the borrower can cancel it at any time with a notice period of three months (see Section 489 (2) BGB).

fixed interest rate agreement

A loan agreement with an agreed rate fixation can either be terminated after the fixed interest period has expired with a one-month notice period or, if more than ten years have passed since the loan amount was paid out, with a notice period of six months.

If the cancellation is made on time and confirmed by the bank, the borrower has two weeks to pay the remaining amount due. If he lets this period pass, the termination becomes ineffective.

Termination on the part of the borrower cannot be excluded by contractual agreements (see § 489 Paragraph 4 BGB). This also applies to clauses that may be contained in the bank’s general terms and conditions.

If the borrower agrees to reschedule with his bank, the existing loan can either be terminated by mutual agreement or the contract can be changed purely. Legal deadlines are then not to be observed.

Possible consequences of early loan repayment

Possible consequences of early loan repayment

Most credit institutions and banks provide for the payment of a so-called prepayment penalty by the borrower in the event of early loan repayment. This is justified with the expenses arising from the replacement and the loss of profit due to the shorter contract term.

The prepayment penalty is legally stipulated for mortgage-backed loans (see § 490 BGB), but not for other forms of consumer credit. Conversely, banks are also not prohibited from charging prepayment penalties for conventional loans. A corresponding contractual clause is therefore to be regarded as lawful.

However, the prepayment penalty cannot be claimed if the borrower exercises his right of termination within the statutory notice period. Such a contractual clause would then be considered null and void.

If the borrower does not terminate within the statutory deadlines, the prepayment penalty in the amount of the lost interest profit for the difference can be raised up to the possible time of the ordinary termination.

Many banks refrain from collecting a prepayment penalty and instead charge the borrower processing fees for the early settlement of the loan. These clauses are legal and cannot be challenged.

Conclusion on early loan repayment

 

Before an early loan repayment is initiated, it is advisable to make a precise calculation of the current and future cost situation. As many factors as possible should be taken into account in this calculation in order to be able to accurately assess your own economic situation and performance. Credit offers can then be checked on this basis.

Attractive loan offers are very common, but instead of accepting them directly and thinking about a replacement, you should first submit the offer from your own bank and try to improve the current conditions in the existing contract. Due to the high market pressure, the banks are often willing to meet the customer in order to retain them.

If there is no room for negotiation at the bank, a detailed check should be carried out before a loan is terminated to determine whether this would result in a financial advantage. Above all, a possible prepayment penalty or a contractually fixed processing fee can cancel out the interest advantage of a new loan.

Special repayments as an alternative to loan repayment

Special repayments as an alternative to loan repayment

Many banks give their borrowers the opportunity to make special repayments to reduce their debt. Special repayments are contractual extra payments to the credit account and reduce the interest charge accordingly.

Special repayments can usually be made by contract at the earliest after a six-month period has elapsed and, in addition, must not result in the monthly repayment being reduced. Only the remaining term of the loan can thus be shortened.