How to speed up loan repayment, and is such a move cost-effective?
If given the opportunity, a majority of us would like to accelerate the repayment of a loan or settle it entirely. How to lessen the burden of a loan, especially if we suddenly have the funds available for repayment?
Long term loans, such as mortgages, put an exceptional mental strain on the borrower and adversely impact the day-to-day costs of living. Many of us dream of winning the lottery or receiving a big inheritance just to finally be able to forget about the loan, which in a different case will be our responsibility for many years. Suppose our dreams came true and we have the opportunity to partially early loan repayment and even get rid of the commitment completely. At first thought it’s the perfect scenario. Yet it isn’t really worth it.
By granting Long-term loans, banks benefit from interest charged over several years. Therefore, it’s not in their interest to support the borrower in early repayment of the loan. However, such a move cannot be stopped. Instead, the customer may be discouraged from immediately leaving the commitment, mainly by implementing a commission on early repayment. The commission may be as low as several percent, e.g. 2.5 or 3%, and apply for the first few years from the date of the first repayment.
So, before we decide to speed up repayment, we must carefully read the conditions imposed by the bank in this regard. As a matter of fact, it’s worth getting interested in this matter when choosing a bank, before signing a contract. Particularly in a situation where we have a real prospect of more cash in the future which could help us pay off our liabilities. Some banks however, act in the Best interest of the customer and do not introduce the commission in question.
Should you part with your loan?
If we have the right funds, of course, we can repay our loan entirely regardless. For many, the relief from getting rid of the commitment is worth incurring the extra costs, including fees. Let’s not forget, that by repaying the loan before the deadline we rid ourselves of interest and release our collateral.
After receiving a boost in funds, we can also make an overpayment, without shortening the Repayment deadline – subsequent instalments will simply be lower. The last option is to pay off part of the liability without changing the number of instalments, and thus actually shortening the repayment time frame. However, if we have enough patience and are able to save money, we can wait through the repayment period burdened with a commission and deal with instalments when it’s most cost-effective for us. The key to a wise choice is a thorough analysis of the contracts signed and the concluded deadlines, the amount of commission and interest.
For someone who has more than one loan on their plate, consolidation, which combines all loans into one commitment, can be cost-effective. We can decide on such move even if we have loans from various banks. In this case it’s worth looking at offers for a consolidation loan. Most often, a consolidation loan means lowering the instalment amount and Extending the loan period.
However, its main goal may be to transfer all debts to one institution and make them more legible. In practice, we may choose higher instalments and pay off the loan much quicker, on slightly more favourable terms.