Paying out a loan early sounds tempting. But is it really worth it? Let’s find out!
The wedding was fantastic, the new kitchen is built in – now all that remains is to repay the loan. This can take a few months to years. Special repayments, i.e. additional payments, help you to pay off your loan faster and thus often save a lot of money. We will explain to you what to consider in the event of a special repayment.
What is a special repayment?
Special repayments for loans are payments made in addition to monthly installments. This allows you to reduce your remaining debt faster, i.e. repay your loan faster overall. Because you have to pay less interest the shorter the term of the loan, you can sometimes save money. In addition, loans can include other costs such as insurance, which you can also save with a shorter term.
You are also debt-free again faster and can use your money for other things. In the case of a car loan with transfer by way of security, the additional advantage is that the car used to be legally yours. So if you have a larger amount of money in prospect – for example, an annual bonus, Christmas bonus or a tax refund – it may be worthwhile to consider special repayments.
Costs of a special repayment
Whether the special repayment costs you something depends on the type and conditions of your loan. There are usually no costs for loans with an already shorter term. For credit cards, for example, remaining debts can simply be repaid by transferring to the card account. Since the interest rates on credit cards are often very high, a special repayment is particularly worthwhile here.
If you have a framework loan in which you can flexibly withdraw a sum from a previously agreed credit line, a special repayment is usually also possible at any time free of charge by means of a transfer in a freely selectable amount.
Special repayments are usually possible for longer-term installment loans, but depending on the bank and contract conditions, a fee called early repayment compensation may apply. Finally, the bank missed out on interest due to the special repayment. If your contract contains such a fee, you should calculate whether the special repayment is really worthwhile.
If you take out a new loan, like one of DSCR Mortgage Loans In California, and can foresee that you want to use special repayments, you should weigh your options carefully. In return for special repayments, the bank may require an interest premium, i.e. an overall higher borrowing rate on the loan. However, many banks also offer free special repayment for installment loans.
The best time
The frequency and timing of free special repayments are also often contractually stipulated, for example, once a year or once a quarter. Again, the faster, the better. So the best time is at the beginning of the year. Unless otherwise requested by the bank, special repayments will be made by bank transfer with the purpose of “special repayment”. Also, enter your contract and/or customer number.
Either way, you should not miss the fixed date, otherwise the entitlement to the free repayment usually expires until the next regular date. So if it is a fixed annual sum, it is best to set up a standing order.
Don’t forget the repayment rate
If your financial situation basically improves, for example due to a new job with a higher salary, you should consider increasing your regular repayment rate. A higher monthly installment also leads to you shortening the term of the loan and saving total interest. It may be worth thinking about debt restructuring instead. The existing loan is paid off by a new loan with better conditions (such as lower interest rates). This can also save a lot of money in the medium and long term.
Here the special repayment is worthwhile
Basically, a special repayment has the decisive advantage that the term of the loan is shortened and you can thus save interest. However, it is important to pay attention to the conditions of the special repayment. The contract usually determines whether special repayments are free of charge or whether a fee is incurred, and to what extent and how often a special repayment can be made.