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Monthly repayments of a loan often affect the financial situation. Many borrowers have the desire to repay the loan quickly in order to increase their financial freedom. A loan repayment also enjoys great popularity, as borrowers can effectively save money.

This is a loan repayment

A loan repayment is a rescheduling of the borrower’s debt. The borrower usually takes out a new, inexpensive loan to repay the existing loans. The new loan often comes from a new bank. A calculation must be made to determine whether a loan repayment is possible. If the savings on the new loan through interest are greater than the cost of the loan repayment, borrowers should consider this procedure.

In the case of loan repayment, the focus is on rescheduling the debt with a new loan. However, there are also the following situations in which borrowers are redeeming the old loan.

  • Inheritance
  • Sale of goods or real estate
  • win the lottery
  • Payment of time deposits or dividends
  • unexpected premiums from an employer or insurance company

Reasons for a loan repayment

There is one reason in particular for the loan repayment: financial advantages. After all, borrowers only decide to repay a loan if they benefit financially. By making a one-off payment, the borrowers trigger the loan and have no further financial obligations from then on. The repayment is almost always based on another favourable loan agreement. Thus, the borrowers effectively save money. It can therefore make sense to borrow money from one bank to pay off a loan from another bank. Financial motives are always decisive for a loan repayment.

The right time for loan repayment

Borrowers ask themselves when is the right time to redeem their own loan. In principle, it is always worthwhile to proceed when a new loan is cheaper than continuing to pay off the old loan. Phases of the low interest rate policy are particularly suitable for this. When consumers get low interest rates on new loans, the right time has come for a loan replacement of the expensive loan agreement. The same applies if borrowers use their overdraft facility constantly and frequently. Since the overdraft interest rates are above average, the loan repayment is a worthwhile alternative.

These are the advantages

When borrowers decide to repay a loan, they can benefit from various advantages. On the one hand, savings are conceivable because the new loan has better conditions than the old loan. In the best case, borrowers can even save money and build up financial reserves. Furthermore, it is possible to redeem various loans and thus gain a better overview of one’s own finances. From now on only the repayment of a loan is necessary. In addition, consumers can improve their own creditworthiness by paying off a loan. Many current loans have a negative effect on the credit rating. With only one single loan, a better score is the result.

In summary, a loan repayment offers the following advantages:

  • good financial overview
  • better credit rating
  • lower financial burden
  • Savings through debt rescheduling

Procedure for loan repayment

The correct procedure for loan repayment is the responsibility of the borrower. After all, borrowers must meet certain conditions and proceed in a proper manner.

Is the loan repayment possible?

First of all, the question arises whether and when loan repayment is possible at all. This depends on the individual contractual conditions. In principle, all loan agreements have notice periods. Consumers must observe these. However, under UK law, the more recent instalment loans can be terminated at any time. In principle, the possibility of loan repayment differs depending on the contract.

Comparison of several offers and calculation of the usefulness

If there is the possibility of a loan repayment, borrowers must then compare several offers. Now it is crucial to find the best credit offer. Afterwards, a bill is needed to determine whether it really makes sense to replace the old loan. A comparison of all the costs involved makes a financially based decision possible.

Loan conclusion and redemption

After the decision for each loan repayment, the contract is concluded. After the loan amount has been paid out, the loan is redeemed. As soon as the money is available, a termination of the old loan agreement is possible.

Tips for the perfect loan repayment

If you want to redeem your credit, you have to follow several tips. After all, redeeming your loan is one way to save money effectively. Replacing a loan in times of low interest rates can lead to large savings. In addition, borrowers should always calculate in advance how much money is really saved. By comparing different credit offers, consumers are on the safe side to take the best offer and to use the full potential.

This is the early repayment fee

Not all lenders and financial institutions allow early repayment of the loan. Frequently, costs are incurred for the redemption in the form of the so-called early repayment fee. Finally, the lending bank suffers interest losses, sometimes considerable ones. The bank’s profit is lower due to the early repayment. The so-called early repayment penalty serves to compensate for the loss. The loan agreement specifies the amount that the redeeming borrowers have to pay.

Differences between loan repayment and unscheduled repayment

In common parlance, loan repayment and special repayment are often used synonymously. However, there is a striking difference between the two variants. Whereas a new loan completely replaces the old loan when the loan is redeemed, borrowers pay a higher amount when making unscheduled repayments. The money is used for partial repayment of the current loan without changing anything about its existence. The remaining term of the loan is reduced, the same applies to the loan amount. However, the credit agreement remains in force. Special repayments are connected with comparatively high costs for some loans.

Loan repayment and residual debt insurance

Anyone who took out residual debt insurance when the credit agreement was concluded wonders what happens to the residual debt insurance after the old loan is redeemed. It is not possible to transfer the residual debt insurance; instead, notice of termination is required. In principle, this is not a problem. In addition, the borrowers will be repaid the insurance premium.