Upon receiving the extra pay, when collecting a salary bonus or winning the lottery, many people consider canceling their debts in order to lead a quieter life. In fact, one of the main concerns of Spaniards is the increase in their mortgages. In the specific case of consumer loans and other financing products, it is possible to reduce the total capital to be repaid and consequently save on interest, returning a portion of the principal of the early loan, which is known in technical terms like “make early repayment. “
As we say, if you repay in advance a fraction of the capital you have left to repay a loan, you can save a lot of money on interest. However, as pointed out by the financial comparator MakeMyCash, the same is not saved by reducing the monthly fee than by shortening the repayment term. Therefore, in this article we will tell you which of the two options you will save more and what other factors you should consider when paying off a loan in advance.
Reduce the quota or term, how do you save more?
If you want to return a portion of the capital of an early loan, the banks will offer you two options: reduce the amount of the installments or shorten the repayment term keeping the monthly payments intact. The savings are notable in both cases, but if you decide to shorten the term, you will have to pay less in total, since interest will be generated for less time and therefore the final amount to be paid will be less.
To make it easier to verify, in the following example we show you how much money you would save if you had a loan of 5,000 dollars to pay back in three years to 8% TIN and you decided to repay 2,000 dollars in advance:
- If you reduce the fee of 156.68 dollars to a monthly payment of 94.01 dollars while maintaining the three-year repayment term, you will pay a total of 384.35 dollars in interest.
- If you reduce the term to 21 months by keeping the fees of 156.68 dollars, which you will have to pay in interest will reach 220.34 dollars.
As you can see, if you repay a portion of the loan in advance by shortening the repayment term, you will have to pay a somewhat higher installment than if you decide to reduce the amount of your monthly payments, but in the end you will pay 164.01 dollars less in interest, so That the savings will be greater.
Also, if possible, it is recommended that you make the early repayment during the first months of validity of the credit. During that period, the part that is paid in interest is greater than when the term ends (this is how the French repayment system works), so if you return a part of the loan amount during its first months of life, you will save more money than if you make the refund later, because at that time you will have already paid a lot of money in interest.
Early repayment may have a cost
By law, financial institutions are required to allow early repayment or cancellation of their consumer loans. However, the same rule states that they can charge a commission that compensates them for the loss of interest income. This cannot exceed 1% of the capital reimbursed if there is more than one year left for maturity, while if there is less time, the surcharge can be up to 0.5%.
For this reason, if you anticipate that you will be able to repay a portion of your loan in advance, it is advisable that you hire a product that does not include this compensation for early repayment. However, you should keep in mind that even if they charge you this commission, you will always be aware of repaying capital early, since the amount of money you will save on interest will exceed the surcharge they charge you.