Possibilities of prepayment for a personal loan
The general conditions of personal loan fixed by the contract of the lending institution allow, in the most of cases, a prepayment. In principle, if the customer prepaids the credit, he is entitled to foregiveness of interests and appropriate reduction of costs related to the actual length of credit.
To prepay a credit, there are two possibilities:
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- To pay an higher amount than the monthly payment. For example, you have a monthly payment of 700.- CHF, then you can pay freely 900.- CHF or 1500.-… every month.
- Pay the credit balance in one go. For example, you have already paid 18 months for your credit that has a duration of 60 months ; you can pay the remaining 42 months in one go. You just need to have a final account from the lending institution.
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Why a personal loan is cheaper with a prepayment?
First the forgiveness of interests allows the customer to pay less costs for his personal credit. This is because higher the refund amount is, lower the payable interests are (constant annuity). Thus, when the personal credit is prepaid, the customer pays less interests! For example, if you refund your credit in 2 years instead of 5 years, you do not have to pay interests for 5 years but only on the actual duration of the credit and according to the terms of use in force.
And what means the appropriate reduction of costs related to the actual length for credit? If you repay your loan, you pay extra interests. For example, you pay your credit in 2 years instead of 5 years. The monthly payments were established for 5 years and not for 2 years. Then you pay too many interests because the interest has been determined for a reimbursement of 5 years and not 2 years.
Thus the credit agency reimburses the extra interests paid. When you prepay, the banking institution will calculate the interest you pay to the day (and not to the credit duration as at the conclusion of the contract). For example, if you pay your credit in 2 years or credit in 2 years and 20 days, the appropriate reduction of costs related to the duration of the unused credit will be somewhat different.
Why to award reductions for early repayment?
The personal loan costs less to the customer who repay because the financial institution have the money back faster. The financial institution can use this money into a new credit and recover again interests on that new credit.
More quickly refund the customer, more faster the risk taken by the bank lending decreases. Because remember, the interest of a personal credit depends on the risk taken by the financial institution at the time of the loan. This also explains why the interests of a credit are decreasing: higher the amount is refunded, less the risk is not to get back the money.
If you want to know more about the possibilites for early repayment of a personal loan or more broadly on credit, please contact our partner credit-loan.
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