The holder of a cash loan can always pay off all or part of his debt faster. This principle is introduced by the current Consumer Credit Act. Banks allow early repayment of the loan also to those customers who bought a flat for the money borrowed. Persons interested in overpayment should remember that the profitability of such a solution depends on several factors (e.g. the amount of interest). In the case of a mortgage, the earlier repayment may be charged a commission.
In addition to the lower interest rate, the commission must also be included
In the case of early loan repayment, the bank recovers the amount borrowed faster, but also loses future interest gains. Sometimes the lender compensates for losses due to interest that the customer does not pay. For this purpose, a bank is served a compensation commission (also known as a commission for early repayment).
In the case of mortgage loans, the compensation commission is usually not collected after 3 to 5 years from the signing of the contract. The situation regarding cash and car loans (for non-business purposes) is slightly different. The bank may charge a commission for overpayment of such installment obligations, if the following conditions are met:
- the interest rate on the loan is constant (at least during the period of overpayment)
- the amount repaid in the next twelve months is higher than three times the average salary in the corporate sector from December of the previous year (this limit is USD 13 135.35 in 2015)
The rule presented follows from the Consumer Credit Act
Due to quite complex regulations, most banks simply give up the compensation commission in the case of cash loans.
Any compensation commission must be included as the cost of early repayment. The benefit for an overdraft borrower is associated with a reduction in future interest. The decrease in interest expenses will be visible regardless of which solution the bank chooses after the overpayment (reduction of installments or shortening of the loan period).
It is worth remembering that the effects of overpayment depend on the interest rate and the length of the remaining loan period. The impact of these factors is illustrated by the following examples.
The owner of a cash loan, after 18 months from signing the contract, decided to make an overpayment. The loan returned in 48 equal installments has a value of USD 20,000, fixed interest rate (10.00%) and commissioned loan (3.00%). After 18 months, the debt balance was USD 13,217.74.
Thanks to the overpayment of USD 3,000, the bank reduced the installment from USD 522 to USD 398 (while maintaining the original loan period). As a result, the sum returned to the bank will fall by 15% (USD 3736) by the end of the repayment period. The same result is USD 3693 if we assume that an identical overpayment (USD 3000 after 18 months) was made for a loan with an interest rate of 9.00%.
The mortgage holder, 50 months after signing the contract, decided to make an overpayment. The loan returned in 300 equal installments has a value of USD 250,000, a margin of 1.50% and a commissioned loan (3.00%). After 50 months, the debt balance was USD 227 520.40. Thanks to the overpayment of USD 30,000, the bank reduced the installment from USD 1,581 to USD 1,369 (while maintaining the original loan period). As a result, the sum returned to the bank will fall by 11% (USD 52 810) by the end of the repayment period.
This result includes a commission for overpayment (1.00% of the overpaid amount) and a constant WIBOR level throughout the loan period (4.00% on average). If an identical overpayment (USD 30,000) was made after 100 months of repayment, the reduction in the total amount transferred to the bank would be USD 49,288.
Only some of the bridges can perform similar calculations. Other borrowers should ask a bank employee to prepare and submit relevant calculations (including the costs of compensation commission). It is worth remembering that in the case of loans with a variable interest rate, the results of the calculations will only be approximate.
The situation of “currency” debtors is more complicated
The second example presented concerns a housing loan in USD. Forecasting the effects of overpayment is almost impossible if the bank’s customer chooses ‘mortgage’ settled in a foreign currency (e.g. Swiss franc or euro).
The current value of such a loan depends on the situation on the currency market. Therefore, it may turn out that after paying the overpayment, the borrower will have a higher debt and a higher installment than before. This situation is possible after the weakening of the dollars.
Despite the difficulties in assessing the effects of overpayment, the holder of a foreign currency loan should always follow one rule. It says that the loan is worth overpricing when the exchange rate of the foreign currency (franc, euro) is low. Then the same amount expressed in dollars, more will reduce the currency debt balance.