Early Repayment of the Loan or Overpayment What Pays Off?

Everyone who took a cash loan or a mortgage had to sign a statement about the risk of a variable interest rate. Therefore, he should be aware that his interest rate on the loan changes and, as a result, the amount of monthly installments changes. Low interest rates caused that mortgage loan installments decreased significantly. NBP interest rates are the lowest in history and jabank rate is below 2%. When we add our loan spread to it, we will get its interest rate.

Interest rates, however, will not continue to fall. Each borrower must be prepared to increase their installment.

An example of a mortgage

Early repayment of the loan or overpayment What pays off?

A loan in the amount of PLN 300,000, a margin of 1.7 percent, a loan term of 30 years

margin 1.70% 1.70% 1.70%
jabank 2% 4% 6%
Interest on the loan 3.70% 5.70% 7.70%
Monthly loan installment PLN 1380, 84 1741, PLN 20 PLN 2138, 88

Why pay your credit early? The answer is simple, the most important premise is the possibility to reduce its costs or, for others, to pay as quickly as possible and to get rid of the burden that significantly limits their home budget.

Each loan is repaid with interest, and these accumulate over the years. So if someone borrowed 300,000 PLN for thirty years at 6, 5 percent. annually, it has 382 633, 47 thousand additional repayments of interest – of course it is a purely theoretical assumption if the borrower repaid the loan for 30 years and the interest rate would remain at the same level.

Early repayment can definitely reduce this amount. Therefore, banks apply appropriate provisions in loan agreements to additionally hedge against the loss of earnings, which is every monthly income due to principal and interest installments, where the earnings for the bank are of course interest due on the granted loan obligation. As for the provisions in the credit agreement, I mean all forms regarding both overpayments and full repayment of the mortgage. In most cases, they range from 1 to 3 percent. amounts of early repayment within 3 to 5 years from signing the loan agreement. So if someone wants to pay back the above-mentioned 300,000 zlotys faster. zlotys for the purchase of an apartment, will have to additionally prepare from 3 to 9 thousand. zlotys to cover the compensation charge and usually just called the commission for early repayment of the loan.

Every moment of overpaying a mortgage is good

Every moment of overpaying a mortgage is good

Monthly installments become lower and most importantly interest on the loan decreases. Overpaying a mortgage with low interest rates will not matter much to us. If we decide to make overpayments, we have three solutions to choose from:

a) overpayment of the loan, leaving the current repayment period
b) overpayment with shortening the repayment period, but keeping the current installment amount
c) overpayment with a shorter repayment period – a loan installment increase

In the case of point. and by overpaying the loan, we reduce the monthly loan installment, but it does not significantly affect the total cost of the loan, it would have to be systematically made of significant amounts. The most sensible solution is to use point b when making a larger amount of overpayment, eg 20,000 or 50,000 PLN, at the same time shortening the loan period to the current amount of the installment that was determined when calculating the original creditworthiness. It should be remembered that shortening the repayment period involves signing an annex to the loan agreement. It costs from PLN 100 to PLN 500 depending on the bank and its Table of Fees and Commissions. In addition, when we would like to use the point c to shorten the loan period even more, which will increase the loan installment. As a result, what will change the ratio of the amount of capital to interest in the monthly loan installment. This solution positively affects our benefit by paying back more capital each month and giving less interest. In addition, this treatment affects the total cost of the loan, which is reduced. However, it should be remembered that when shortening the loan period, banks will once again examine our creditworthiness! This treatment will certainly be easier to carry out at low interest rates, because each of us then has greater creditworthiness and at the higher interest rates this will be more difficult to implement.

So when is a good time to repay or overpayment? It is certainly more profitable to repay the loan or make it overpay when the interest rates are high or rising. In such a situation, making an earlier overpayment of a mortgage will avoid a significant increase in the monthly installment of the loan, which can be seen in the simulation presented at the beginning of this article.

And the truth is that Mortgage is the cheapest available form of raising money on the market in the form of a loan – a special loan. Only student loan is cheaper as the name suggests for students but not for the purchase of real estate. Thus, anyone who took a mortgage is in a more comfortable situation than the holder of a higher interest-bearing cash loan (loans for any purpose). In the present situation, I would urge that an unexpected financial surge be used to build a safety cushion, which will be useful in the period of rising interest rates, loss of employment or our sudden illness that will break the professional activity. Having a financial surplus in the form of cash in your account on the proverbial deposit will certainly provide you with a definitely different psychological comfort during this period.

Funds in the form of financial surpluses, you can also invest – the best investment will be to buy real estate for rent. The funds from renting this property should be used to cover the monthly installments of the loan already repaid. In this way, your other property will pay off the loan granted for the purchase of another property or the construction of a house.

Conditions for early repayment of a cash loan

Conditions for early repayment of a cash loan

Consumer credit usually found under the concept of a cash loan or a cash loan – it can be used to finance daily expenses, including purchase a TV set or other household appliances, travel to your dream vacation or many other things that we need at the moment. A consumer loan is a loan whose amount is not greater than PLN 255,550.

The current Consumer Credit Act allows for early repayment of part or all of the cash loan. According to art. 48 of the Act:

  • The consumer has the right to repay all or part of the loan at any time before the deadline specified in the contract
  • The creditor can not make the early repayment of the loan subject to its notification by the consumer

In addition, by repaying a cash loan in advance, in whole or in part, we obtain the right to reduce additional costs relating to the period for which the contract will be shortened even if we bear these costs before repayment. The early repayment of the loan obliges the bank to settle the loan with us within 14 days from the date of the earlier repayment of the entire loan.

Commission for early repayment of a cash loan?

Commission for early repayment of a cash loan?

or what are the costs of early repayment of the loan?

The bank may stipulate in the contract that a commission will be charged for early repayment of the loan provided, however, that:

  • the repayment falls on the period in which the loan interest rate is fixed and the amount repaid over the next 12 months is higher than three times the average remuneration in the enterprise sector from December of the year preceding the loan repayment date (Information on the average remuneration is announced by the President of the Central Statistical Office in Monitor Polski);
  • the commission may not exceed 1% of the loan repaid, if the period between the loan repayment date and the loan repayment date is longer than one year;
  • the commission may not exceed 0.50% of the repaid part of the loan, if the period between the date of repayment of the loan and the repayment date of the loan does not exceed one year;
  • it can not be higher than the amount of interest that we would pay in the period between early repayment and the contractual deadline agreed in the contract and can not be higher than the direct costs associated with this repayment.

However, banks do not charge a commission for early repayment of a cash loan, this fact is already recommended at the stage of granting the product by collecting the Commissions for granting the loan, which is charged in advance and is not refundable. In the case of a loan whose contract was concluded before December 18, 2011, that is before the effective date of the current law, it is possible to repay the loan early without incurring the commission cost. The dates of early repayments must be identical with the dates specified in the contract, as payment dates for individual installments. In this case, please inform the bank no later than 3 days before making the repayment.

Early repayment of a cash loan and reimbursement of insurance costs

If you repay the cash loan and you had the insurance you bought, it is worth asking the bank in writing to return the insurance premium for the unused period of protection in the event of early repayment of the loan. It does not matter if you repay the loan yourself or with another consolidation loan. This refund can usually be credited to your account within one month. How much can you gain from it? 

Early repayment of a cash loan or overpayment, which pays off

In summary, if we are considering getting rid of the loan in whole or in part, we should make sure that the commission for early repayment in our bank is applicable. It’s worth taking a look at your loan agreement and finding records about this situation. Banks are quite reluctant to enter into the contract a record of the lack of payment for early repayment. Most often, we find there the entry “in accordance with the applicable TOiP”. If the agreement contains the above-mentioned clause, referring to the TFC, obtain the current tables of fees and commissions from the bank, which contain information on the amount of the commission that the bank collects when the mortgage is repaid earlier. If you are missing a year or a few months until the end of the period in which the compensation payment applies, it is worth considering carefully to postpone the earlier repayment. The situation looks different in the case of popular cash loans, here it is profitable to overpay the loan or to make a full repayment earlier, because its interest rate is definitely higher than in the case of a mortgage loan.