Is it really worth repaying a personal loan ahead of time?

Is it really worth repaying a personal loan ahead of time?

An early repayment is an option that allows us to return the personal loan that we have in force before time. This amortization may be total, with which we will settle the debt and cancel the credit completely; or partial where we will only return a part of the capital that remains to be returned and that will allow us either to lower the monthly fee that we will pay each month or to continue paying the same monthly payment and shorten the term. However, this option may have commissions and the interests we save may not justify the economic effort involved.

Factors that influence the impact of saving to be amortized

Amortize, whether partial or total, will always allow us to save. However, factors such as if there is a commission for early repayment, the capital that we return before time or the time of the personal loan in which we do it will influence the impact on the savings that allows us to achieve.

Commissions: By law, the commissions for early amortization are limited to 1% of the amount that we reimburse if the term is longer than 12 months and can not be higher than 0.5% if the term is lower. Normally this commission to pay will always be less than the savings we will get, so it will be worth it. Although if we have the possibility of returning it before, it is always advisable to look for a loan that does not include a commission for amortization- more information on the topic.

Capital: the amount to be repaid ahead of time will also have an impact on saving. The higher this capital is to be returned, the more we will save since, even if it is partial, less interest will be generated on the remaining capital.

Term: it is another variable that will also have a great influence. Because most loans are reimbursed with the French method – where the interest rate will be higher at the beginning and will be invested by the capital to be owed as time passes – the closer we are to the end of the loan, the less profitable will be this economic effort to return capital in advance.

Before deciding to write off a personal loan ahead of time, it is always convenient to take into account these three factors that will determine the effect of the savings that we will cause in the financing we have contracted.

To save more by paying off a loan, do I maintain a quota or installment?

In addition to the three variables above, by partially repaying a personal loan we can choose between having the same monthly payment as before and reducing the term or maintaining the term and reducing what we pay each month.

To see it in a simple way, imagine that we have a pending capital to pay € 5,000 to return in 3 years with an interest of 8 %. In the following table we can see how much we would save according to the options we choose:

Option

Capital to be amortized

Capital to current duty

Current Fee

Current term

Generated interests

Without amortization

€ 0

€ 5,000

€ 156.68

36 months

€ 640.56

Amortization maintaining term

€ 1,000

€ 4,000

€ 125.35

36 months

€ 512.45

Amortization maintaining quota

€ 1,000

€ 4,000

€ 156.68

29 months

€ 399.36

As we can see, if we choose not to amortize anything, € 640 would be generated on the remaining capital. With an amortization, reducing the monthly payment would generate a total of € 512 in interest and if we maintain the monthly fee (reducing the term), the total would be € 399.36, the option with which we would obtain the greatest savings in interests.