What are your rights and obligations when you want to pay a loan before its term?
You have taken out a private loan for a certain amount and you want to pay it back before it expires. Do you have the right, and if so, what are the conditions?
Early repayment of consumer credit
Will you have to pay a fee? And what about interests?
Yes, you have the right to refund before the due date. Your loan can be repaid in full at any time by anticipation. Depending on your contract, there can be a fee to do that, or not. This have nothing to do with whom you negotiate the contract – a legit loan broker or directly with a bank.
The early repayment corresponds to the settlement of the outstanding capital, before the originally scheduled term of the loan. The early repayment is total when you repay all the outstanding capital. The early repayment is partial when it relates to a part of the sums due. You do not pay the interest that remained to be paid until the end of the loan or on the partially reimbursed amount.
Back to the matter in hand. First, you pay only the interest starting on the date of the signature of the contract until the day of the full repayment of your loan, even if it is realized before maturity.
Second, a consumer credit can always be refunded in advance, in part or in full, even if the loan agreement does not indicate it. But a compensation or prepayment penalty may be paid to the lender in the cases provided by law.
The lender is compensated for this shortfall by the early repayment indemnity (IRA). But for consumer credits, the lender does not have the right to ask for the payment of this allowance, except in certain cases.
Early repayment without compensation
No compensation is due if you pay in advance:
- a bank overdraft,
- a revolving credit,
- a credit whose rate is not fixed at the date of the early repayment or a depreciable credit (personal loan, car loan etc.) when the amount reimbursed in advance is less than the legal cap.
Early repayment with compensation
Early repayment compensation may be claimed by the lender when you prepay a personal loan or an assigned credit for more than the legal cap a 12-month period.
The amount of compensation depends on the length of the loan remaining to be repaid
The compensation is all the higher as the normal end of the credit is distant in time. If the prepayment is made:
- less than one year before the end of the loan: the indemnity can not exceed 0.5% of the amount repaid,
- more than one year before the end of the loan: the indemnity can not exceed 1% of the amount refunded.
Whatever the situation, the prepayment penalty must not exceed the amount of interest you would have had to pay between the prepayment date and the original end of the credit agreement.
Early repayment of mortgage credit
A mortgage can be paid in advance, in part or in full. The loan agreement specifies the fees, or prepayment allowance (ARI), that may be required.
A borrower can always, at any time, prepay his mortgage. The bank can not object to an early repayment, except in the case of a partial repayment of less than or equal to 10% of the original loan amount.
The early repayment corresponds to the settlement of the outstanding capital, before the originally scheduled term of the loan.
The early repayment is total when you repay the entire capital outstanding, in case of sale of real estate or renegotiation of credit, for example.
The early repayment is partial when it relates to a part of the sums due, in case of exceptional cash inflow for example.
The conditions for early repayment are set in the contract
To compensate for the shortfall from interest that will not be paid, the lending institution may demand the payment of an indemnity, or penalty, for early repayment. It is not compulsory. That is to say, the lender can claim his payment only if this compensation is mentioned in the contract.
Before the conclusion of the loan agreement, it is possible to negotiate the reduction or even the cancellation of this prepayment allowance. The lender may agree to remove this indemnity, but after a minimum loan repayment period. But in many cases, the clause stipulating the absence of an early redemption fee will not be applicable in the event of the loan being bought back by a competing credit institution.
The conditions of the early repayment are to be studied closely. For “adjustable” fixed rate loans, the contract is often subject to the possibility of partial prepayments without penalty.
The amount of the early redemption fee is capped
This prepayment allowance may vary depending on the type of loan. If it is low or zero for adjustable rate loans, it may be high for fixed rate loans.
The loan agreement sets the amount of the Early Redemption Amount (ARI) you will have to settle with your institution. The amount of compensation is limited by law. Its amount can not exceed 6 months of interest on the capital repaid at the average rate of the loan, without being able to exceed 3% of the outstanding capital.