Loan and early repayment: how to save money

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the duration of the loan repayment

Whatever the interest rate that is proposed, the final cost of a loan will depend especially from the duration of the reimbursement. Indeed, the interest rate is an annual rate. More the duration of the reimbursement of the credit is spread out, more the total interest will be higher. Choosing the duration of your loan is therefore the most important steps:

  • A shorter reimbursement will certainly insure you lower cost, but it will involve a monthly
    loan repayment who will overstep your budget.
  • A longer loan repayment will involve a higher total cost.

The solution: an early repayment

When you sign for a credit, the total of the interest is included in your monthly instalments. For example, for a 36 months loan, you will get 36 identicals inpayment slips. Each payment will contribute to pay a part of the calculate interest. The early repayment consists of paying several monthly instalments in once. Though, the 36 inpayment slips will be repaid in 32 months for example. In this example:

  • You paid 36 inpayment slips in 32 months only.
  • But in these 36 inpayment slips, you pay the interests for 36 months.
  • So you will pay too much, because you pay for a 36 months credit instead of a 32 one.

Interest difference

In this kind of situation, the credit agency will conventionally reimburse the interest difference. Generally, if you hesitate between two durations for your credit, don’t hesitate to take a longer loan repayment. In fact you can always, through early payments, pay off your credit faster than expected, without necessarily paying unecessary interest.

How much money can we save

The total cost of a credit is proportional to the loan repayment duration. In this way, a credit at the same conditions (borrowing sum and rate) will have a total interest twice higher if you double the duration of your reimbursement. You can easily compare the cost of the loan according to the durations via a loan calculator like in Creditloan for example. Thus, for calculating the saving amount in a prepayment simply reduced the total amount pro-rata refund of the actual credit over expected term.

An example

You are borrowing 20,000 Chf upon 36 months with an interest rate of 11,9%. The total cost as defined on the contract will be of 3,868 Chf . If you effectuate an early repayment upon 32 months for example, what do we have?

  • You will pay upon 32 months instead of 36
  • The new cost of the total interest will be of (32/36) x 3,868 = 3,438 Chf

In this example the credit agency must reimburse you a difference of 430 Chf!

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