Loan repayment and early repayment.

What is a loan repayment?

What is a loan repayment?

Colloquially, this means the early repayment of all (residual) debts from a loan contract. Two ways are possible. The loan repayment can be done with a new loan. The new loan can come from another bank or the same bank that issued the original loan.  In the latter case, it is also possible to simply exchange the credit terms, for example to agree on a cheaper interest rate.

If existing loans are exchanged for other loans or if the conditions of an existing loan are changed, this is referred to as debt restructuring or refinancing.  In addition to debt restructuring, early loan repayment from own funds is of course also an option.

If the entire remaining loan is not repaid at once, but only payments beyond the agreed repayment payments are made, which shorten the remaining term or reduce the future installment, this is referred to as special repayment.

Summary and tips

Summary and tips

Also pay attention to flexible terms when taking out a loan: free special repayments are currently standard.  Some loan providers even allow early, total repayment free of charge.  Not every early loan repayment or debt restructuring is worthwhile. Never forego a concrete cost comparison.

Some providers of debt rescheduling loans offer computers with which the possible advantages can be estimated in advance.  The calculation of prepayment penalties for home financing is often not understandable for consumers.

And it is not uncommon for banks to miscalculate to their advantage. Have the prepayment penalty checked by experts or consumer advice centers. Residual debt insurance can cause problems in the event of early loan repayment. Under certain circumstances, the insurance must be terminated separately with the insurance company.

Experience shows that an early loan repayment from own funds pays off economically regardless of the respective interest rate level, provided that a conservative investment is the acceptable alternative for the borrower.  However, never use all of your own funds to repay the loan. A security cushion for unforeseen events, perhaps in the amount of two monthly salaries, is always recommended.

Always contact the lender before taking additional repayments. Have the admissibility and the consequences of early repayment measures confirmed: prepayment penalty? What amount of home finance? Additional costs? What happens to any residual debt insurance?

Early loan repayment makes sense?

Early loan repayment makes sense?

In principle, early loan repayment is worthwhile in every situation. During a low interest phase, expensive old loans can be rescheduled into loans with better conditions.  In periods of high interest rates, refinancing loans with variable interest rates to fixed-interest loans is worthwhile in order to protect yourself against rising interest rates.

For economic reasons, early repayment or faster repayment through special payments with existing equity capital is always worth considering, regardless of interest rates and regardless of the type of loan.  However, the “other side” must also be considered.

For debt restructuring measures, a comparison of the total costs of the new loan and the retraining measure itself with the costs of the old residual loan is essential.  Is the new loan, along with rescheduling costs, cheaper than continuing the original loan?  In addition to the interest rate differential, prepayment penalties play a crucial role.

In the case of mortgage loans for real estate financing, notary fees and fees for the transfer of land register may be added.  Experts estimate the cost of this to be 0.17 percent of the remaining loan amount.

If the early loan repayment is to be effected with own funds, a comparison of the loan costs with the returns of an investment that is considered acceptable is recommended. With savings deposits, overnight money and similar investments, early loan repayment always wins.

In more aggressive investments, the expected return can exceed the credit savings in individual cases. Investing in equity ETFs, for example, brings 5 ​​percent returns and more in the longer term.

Prepayment penalty

Prepayment penalty

For installment loans, calculating prepayment penalties is easy. If the loan is concluded before June 11, 2010, the contract can even be terminated at any time with a notice period of 3 months without incurring prepayment penalty.

Paragraph 502 of the German Civil Code (BGB) applies to loans since June 11, 2010: compensation amounts to one percent of the remaining loan amount, and only 0.5 percent for residual terms of less than one year.

The situation is more complicated with real estate loans. Any loan can be terminated after 10 years without incurring early repayment penalties. This applies even if interest rates are still pending. In all other cases, the bank calculates prepayment penalties taking into account the contractual provisions.

Two methods are used to compensate the bank’s earnings disadvantages through the early loan repayment:  According to the active method, the original borrower has to compensate for the interest differential if the loan interest is currently lower than the agreed original interest rates.

Example: 6 percent were agreed. The bank can only realize 2.5 percent under the current interest rate conditions.  The borrower must balance interest of 3.5 percent on the remaining amount. However, the compensation amount must be discounted.

The active-passive method is more common. It is assumed that the bank purchases certain securities to compensate for the loss of interest.

Compensation calculators from the Internet use this method. With these tools, borrowers can estimate with certainty how high the prepayment penalty will be. In addition to total repayment, special repayments are also possible. Some real estate financiers meanwhile allow special repayments to a certain extent free of charge.

Auto loans

Auto loans

There are no special features for early loan repayment of motor vehicle loans themselves. If the loan is earmarked, i.e. a real car loan with special conditions, transfer of ownership by way of security including delivery of the motor vehicle letter is generally agreed.  This contract has to be canceled and the bank has to hand over all documents about the vehicle.

Mortgage Life Insurance

Mortgage Life Insurance

Risk insurance to hedge credit defaults can be taken out in two different ways. It is possible that the borrower himself becomes the policyholder of the residual debt insurance. In this case there is a direct legal relationship between the insurance company and the borrower.

The borrower has a special right of termination if the loan is completely redeemed early. This special right of termination always exists without an explicit mention in the general insurance conditions.

In many cases, however, the borrower takes out group insurance from the bank. The borrower is then only the beneficiary, while the bank is the policyholder. In these cases, the remaining debt insurance will be processed through the bank.

In both cases, the borrower is entitled to a proportional reimbursement claim if the premiums for the residual debt insurance were paid as a one-off amount.  However, a partial reimbursement of any closing fees for the credit loss insurance cannot be enforced (as of June 2016).

Loan Redemption and Credit Bureau

Loan Redemption and Credit Bureau

Sometimes the question arises whether an early loan repayment through debt restructuring or through repayment with equity has a negative impact on the Credit Bureau file. The faster a loan is repaid, the sooner the Credit Bureau entry disappears. Early repayments improve creditworthiness, they do not deteriorate creditworthiness.

Debt rescheduling should essentially be neutral if Credit Bureau does not increase the remaining loan amount and the term does not change. If several small loans are combined through debt restructuring, this is basically a positive signal for Credit Bureau.

Loan offers with free early repayment

The granting of free special repayments is now standard. The situation is different with early loan repayment. Only a few providers do not charge any costs.  The offers can be compared with a loan calculator. Across Lender has a filter function “free total repayment”, which makes the comparison considerably easier.

Special repayments and early loan repayments are often only possible after a credit period of six months. For example, you can use our recommendation Fine Lender. Select a banking offer and start the credit request.

As soon as you have sent the request online, you will receive a concrete offer. Customer service will be happy to help you take out an early repayment loan if you wish.