October 16, 2019

Loan repayment ahead of schedule – is it worth it or not?

Most of us have loans. Sometimes, however, it happens that we have an extra cash flow. Often, we are wondering if it is worth paying off the loan early.

Situations in life vary. Sometimes we get some inheritance or find a better job. It also happens that we win the main prize in the lottery. This is the last, unfortunately the least often, but we are beginning to wonder what to do with the extra money. How to use them wisely. We usually have loans, whether mortgage or consumer. The first, how rational thought that appears in such situations is the idea of ​​paying off the loan faster. After all, it’s always a burden, and repayment seems like an investment that is undoubtedly hit. Without credit, we can breathe a sigh of relief. We can then spend all the new money on what we want, without worrying about whether we will have something to pay back the installment for.

Early repayment of the loan? What bank is a custom

Early repayment of the loan? What bank is a custom

The credit market in the UK is very complicated. Generally, the rule is that, unfortunately (for us) banks or lenders do not want to get rid of the income that we pay by interest over the next years or months. On the so-called common sense, it seems to us that by repaying the loan earlier, we should save, and the bank should be happy. Unfortunately, this is not always the case.

The first and basic advice in this situation is to read the loan agreement carefully and ask in our bank about the repayment terms. Loans are divided into countless types, in addition, each bank specifies different conditions. It is hard to advise something that will work in every situation. It happens that, for example, with a mortgage, the bank allows you to overpay installments, but only to a certain extent. What? It will be written in the contract. There are also cases when for early repayment you have to pay a fine, e.g. in the form of one percent for each year until the end of the contract. As you can read on the forums, sometimes it is worth paying such a penalty, but you need to calculate it carefully. It’s best to go to your bank and ask how much and what you have to pay for in the event of early repayment.

The higher the interest, the more you get by paying back the loan earlier

The higher the interest, the more you get by paying back the loan earlier

Let us also remember that interest is repaid first, and then the loan itself. We usually have it written exactly. In initial installments, most are usually charged to pay off the interest on the loan, and a small portion to pay off the actual debt. Despite the fact that we pay conscientiously, our debt decreases much more slowly. This is not without reason. In the event of repayment problems, the bank has the full right to demand a much larger amount, arguing that we did not pay the debt, but mostly interest.

This applies (unfortunately to our disadvantage), also in the case of early repayment of the loan. Let us remember that it consists of borrowed capital, costs together with commissions and interest. For giving back the debt, e.g. several years, the bank charges us the latter. But all costs and commissions are paid at the very beginning. For the mere fact of taking a loan. So if after a year or two we repay a loan planned for e.g. 5 years, then we do not have to pay back the interest for the remaining 3 years. However, it turns out that they are not the most burdens for our pocket, but commissions or other costs. And they are independent of repayment time. Therefore, no one will give them to us, because we have paid the debts earlier. Therefore, if we are planning to pay back the loan early, choose those with high interest and low commissions, etc. Never the other way around.

Credit cards – we have a free hand

Credit cards - we have a free hand

It is definitely worth paying off with credit cards in advance. Most often this form of loan consists in the fact that we simply have some balance and it depends only on us how much, when and how often we will pay it back or make a minus. Of course, we must make some minimum payments every month. And that’s when the bank earns the best on us. However, we can pay off all our debts in one go. Rather, any restrictions are rare here. To be sure, you can consult with the bank. Sometimes there may be some strange conditions for us to withdraw from the contract. Banks are unlikely to be happy that we want to give up their services or not pay them interest.

Earlier contract end or lower installment

Earlier contract end or lower installment

It is worth considering renaming the type of mortgage into so-called tracker. Then you can make any overpayments. The situation in this case looks similar to Poland. If we pay more than the installment, we can use two options. Either shorten the loan period, or reduce subsequent installments. If you are precautionary or worried about your financial future, the second option seems a better option. We have money, so we pay more and the amount of our loan decreases. However, we anticipate that our financial situation may deteriorate. Then our efforts will be rewarded and in the event of a small crisis, we can always pay the reduced installment.

This is often a salvation, because as you know, the cost of the mortgage is usually a large part of the household budget. However, if we strongly believe that we will not get in trouble or we are well secured in another way, it is worth considering not reducing installments, but shortening the duration of the loan. Then we will have peace faster and save on interest.

It is worth finding out before you take a loan

It is worth finding out before you take a loan

As we can see, there is no one right answer for everyone. There can be different cases, just as there are different types of loans and banks. That is why it is so important to read the contract carefully before taking a loan. It is also worth finding out what the conditions for early repayment of a loan from a bank employee are. You can also read the forums and then verify this information in your place.

It is worth, especially if it is a mortgage, to consult a specialist. To find out about the thicket of offers and conditions, you really need specialist knowledge. Therefore, the best solution is to determine yourself earlier. Before we take out a loan, we decide whether we plan to pay it back earlier. Then we can find the best offer tailored to us from this angle. It may be that the seemingly most advantageous loan offer will be the cheapest, but if we want to pay it off earlier, it may be the most expensive.