All credit brokers are often confronted with this question from their clients: ” Can I repay my loan early?”. In fact, a borrower may wish to repay their loan early, meaning in advance, in other words before the end of the loan contract.
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Events in life can favor the early repayment of a loan: we immediately think of an inheritance, but that is not the only reason. A change of job, a new cohabitation, a financial windfall, a maturing life insurance policy, capital gains from investments, etc. are all happy and favorable events that may prompt the borrower to repay their loan early.
Principle question: can you repay your loan early?
In other words, can the borrower repay their personal loan or mortgage before the end of their contract? The answer to this question is simple. The law allows any borrower to repay any type of loan at any time during the life of the contract.
Financial question: is it always beneficial to repay your loan early?
It is not necessarily beneficial for the borrower to repay their loan early. We will understand better based on a concrete example: imagine a potential borrower taking out an auto loan for 35,000 € to buy a new luxury vehicle. To finance such a purchase, for a new vehicle, the interest rate will range from 3 to 5%. If the person concerned inherits a large sum, it might be more advantageous to invest this money in an investment that can yield more in the long term than an interest rate of 3 to 5%. Real estate, for example, yields an average of 10% per year. Likewise, certain corporate bonds have interest rates of nearly 7 to 8%.
The interest rate of the loan will therefore be a determining factor and the solution to this question will be a matter of personal analysis.
Early repayment of a personal loan
The borrower has the right, at any time, to repay in whole or in part the remaining balance of the principal early. In this case, they are entitled to a reduction in the total cost of the credit equal to the interest and fees due for the remaining term of the contract. They notify the lender of their intention by registered mail at least ten days before repayment. In practice, most brokers are satisfied with a simple phone notification.
If the period between the early repayment and the agreed contract end date is more than one year, this penalty amounts to 1% of the principal amount being repaid early. If the period does not exceed one year, the penalty amounts to 0.5% of the principal amount being repaid early.
The lender communicates the amount of the claimed penalty to the borrower by mail. This communication includes the calculation of the penalty. The penalty cannot exceed the amount of interest that the borrower would have paid during the period between the early repayment and the agreed contract end date.
The repayment made will be allocated first to the due amounts and the prepayment penalty, and the balance will be applied to the remaining balance due on the day of payment. No prepayment penalty is due if, by application of articles 85, 86, 87, 91, or 92 of the law of June 12, 1991, the borrower’s obligations are reduced to the cash price or the loan amount, or in the case of repayment under an insurance contract intended to guarantee the loan repayment.
Early repayment of a mortgage
Early repayment of a mortgage is also possible at any time during the life of the mortgage contract.
In this case, the borrower will owe a prepayment penalty equivalent to 3 months. The interest amount will correspond to the amount taken from the amortization schedule for the month in which the repayment takes place.
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