It often happens with long-term loans: after a while, you get extra money that you decide to advance to partially or totally pay off the debt you have in the form of a loan. Doing this is not only possible, but also saves money on interest.
How to cancel the loan early
Bank and non-bank loans include capital and interest, which are calculated based on the repayment term agreed with the entity.
For the money back the so-called French system is used, which works as follows:
- The quota is always always the same, from the first to the last
- During the first years of the loan, more money is paid in interest than in capital (within the same installment), and this proportion is invested over time
This means that the earlier the loan is amortized, the more money is saved in interest, because there is less time to accrue them.
At any time during the life of the personal loan, part of the money or even all of what is owed to the entity (including interest to date) can be amortized. By paying at once, those interests that would come into play from that moment until the end of the agreed initial term are saved. The savings can be remarkable.
Does the advance payment of the loan have any cost?
It depends. There are entities that offer this possibility at no additional cost to the client, especially online financial entities when it comes to online loans, and in the same way they can be small or moderate amounts as larger amounts.
There are also entities that implement a policy of including a small cost of early cancellation, which will be specified in the contract or in the terms and conditions of the loan in a transparent manner. In these cases, the price of prepayment is usually expressed in terms of a percentage of the outstanding capital.
The entities that make this collection intend to recover a part of the capital that will not be paid as future interest. There are usually very high commissions, and it is almost always important to cancel the loan early, even if you have to pay this price.
In addition, getting out of debt is always good news for any domestic economy, since the pressure on income is reduced and personal finances are protected against contingencies that make it difficult to pay these monthly fees.