It is common for borrowers to decide to repay their credit, in whole or in part, in advance, for various reasons. In such cases, they may be liable for a prepayment penalty. Our legal expert examines the ins and outs of this penalty.
Simulate your loan online
Concept of a prepayment penalty
The prepayment penalty corresponds to the difference between, on the one hand, the interest that the bank would have received until the end of the credit if the credit had not been repaid in advance and, on the other hand, the interest it can earn by reinvesting the capital repaid in advance in the interbank market.
Indeed, in the event of early repayment, the lender recovers the capital but will no longer receive interest.
Therefore, it will incur a loss of income for the remainder of the initial loan term.
To compensate for this loss of income, the lender will request from the borrower a prepayment penalty in lieu of the capital.
Mechanism
The law provides that in the case of total or partial repayment of an interest-bearing loan, a prepayment penalty of an amount greater than 6 months’ interest calculated on the amount repaid at the rate set by the agreement cannot be claimed from the debtor, regardless of the capital repaid and the accrued interest.
In practice, the lender will include a standard clause in the loan agreement stating that the penalty cannot exceed 1% of the capital repaid in advance when the contract still has more than one year remaining, or 0.5% of the capital repaid in advance when the contract still has less than one year remaining.
The prepayment penalty cannot exceed the interest you would pay if you did not repay in advance.
If you repay in advance during a period when the debit rate is variable, the lender cannot claim a prepayment penalty from you.
The consumer is free to repay all or part of their credit at any time in advance.
To do so, they must notify the lender of their intention by registered mail at least 10 days before repayment.
Within 10 days of receiving the consumer’s letter, the lender will inform the borrower of the amount of the penalty claimed on a durable medium (regular mail, email) and specify the calculation of the penalty.
