Repayment of a Bank Loan: Different Options
Repaying a loan is a good way to save, because by choosing this option you will pay less interest and the period of your debt will be reduced. In this KillMyBill guide we tell you how to perform this process and what are its advantages and disadvantages. Do not miss it!
If you have requested a bank loan some time ago due to a specific financial need, you may still find yourself paying the fees that allow you to reimburse the amount granted.
However, although the term for the return of the money generally goes around 5 years , many people decide to reduce this period and thus obtain some benefits. In effect, by repaying your loan early you will avoid paying more for interest, since the repayment term will be less.
Let’s review how you can carry out this operation.
Reduce the term of the loan and pay less interest
By reducing the term of your loan what you will do is pay a fee very similar to the current but for much less time. For example, if at the beginning of your contract the amortization period was 5 years, when negotiating with your bank and reducing the term it could be as little as 3 years.
The reduction will be made according to your new payment capacity , however, it is important to remember that the refund never reduces the return time in more than half of the initial period.
What does this option allow?
Undoubtedly, if your economic situation has improved in recent months and you are able to pay a little more in the fees that correspond to the payment of your bank loan and thus reduce the stipulated term in the beginning, you could obtain great benefits.
The first one is that you will pay less interest and the monthly fee will vary only around 15 or 20 euros per month. Now, if you make an early repayment, which means that you pay the bank part of the loan at once, the advantages will be even more important.
Early repayment: dodging the French system
The system of repayment of bank loans used in Spain has as a consequence that the client pays more interest than capital in the first repayment installments of his bank loan.
This is what many know as the French system, where only in the last months is when most of the outstanding balance is paid.
However, if you repay a portion of the amount borrowed in advance during the first years of the term, you will save more money in interest than if you made the early repayment later.
Maintain the term in exchange for a lower fee
If you have made an early repayment, with which the total of your debt has decreased, you can also opt for a second possibility: keep the deadline in exchange for a lower fee.
This option can be applied perfectly in those cases where the client has received a specific sum of money but where he has not increased his capacity of indebtedness.
For example, if you receive an inheritance you can make an early repayment of the debt, but then you do not want to pay more than initially agreed on each monthly payment.
Compensation for early repayment
A point that you must not forget is that there are banks in Spain that require compensation for early repayment.
This compensation consists of a commission that you must pay at the time of returning a part or all the money borrowed before time.
According to Law 16/2011 of consumer credit, this commission can not exceed 0.5% of the amortized capital if there is one year or less of the term to amortize the debt or 1% if there is more than one year left for its expiration.
In this case, and before wanting to pay a large sum of your debt in advance, we advise you to find out if your bank includes this commission in your contract.