Loan extinction: insights and tips
The extinction of the loan consists in paying the sum left before the agreed date and in a single solution.
Why should we pay off the loan in advance?
There could be two reasons:
– the first is to close a debt and to have more liquidity
– the second is to pay off a minor debt with a sum coming from a loan that is much cheaper than the first.
Benefits of extinguishing the loan: freedom and interests
The advantages deriving from this are, in the first case, the fact that the mind is no longer committed to thinking of having to pay an installment every month: in this case, there is a considerable saving on interest. In the second case, on the other hand, the positive thing is that you have the possibility of entering into a new contract for a new loan that is easier to obtain, even in interest rates. In this case, we can talk about debt consolidation loan.
Debt consolidation loan: definition and advantages
This loan consists of a loan that combines every debt that we also have of a different nature and makes it into a single installment that is still less than the sum of the previous ones. The data consolidation loan is very advantageous if we think that we will not have many newsletters but one and above all because there is a reduction in the overall tax and consequently the relative interest rates. The required guarantees and requirements are similar to those of any other loan.
Loan extinction: savings on interest
Saving interest is the main reason that should push for early extinction.
The focal point is that every time we go to pay an installment, there is an added interest rate. With the early repayment this does not happen because, if you go to pay the remaining installments in a single solution, we will not apply the interest rates that would have been applied if we had continued to pay the installments in a normal way.
Unfortunately, given that for the lender, the fact of not paying any more interest represents a loss, many banks or institutions charge a commission that must be applied to the early extinction of the residual loan. Fortunately, not all institutions charge the commission and that is why you have to check the data that certifies it. Furthermore, this fee does not fall within the Taeg calculation.
The commission referred to is not more than 1% by law if the debt is more than 10 thousand euros and the deadline is more than one year. Otherwise, it will be 0.50% for amounts less than 10 thousand euros and no commission will be applied. All this is provided for by law in art. 40 paragraph 1 of the banking text.
Many ask, for example, if with the extinction of a loan in progress it is possible to ask for another one. The answer is yes, because, if we decide to request a new loan and our application is accepted, we would have the possibility to pay off the previous debt in complete tranquility.
Is debt repayment always convenient?
The extinction of the debt is always convenient for the reasons listed above, or the savings on the interest of the subsequent installments that would be canceled. But, if there is not much left or the last installments to be paid are reached, at this point there is no more convenience, because according to the so-called “French” depreciation plan, the interest expense applied to the initial installments is higher than those finals. In practice, they are progressively climbing. For this reason, if your bank had commission costs, they would be higher than the interest that would remain to be paid with the last installments.
In the opposite case, or if the extinction were to take place in the initial period, then the convenience would be almost complete, precisely because in that case one would avoid paying the huge interest.
The extinction of the loan can be total or partial. The total relates to what has just been concluded, while the partial one concerns two alternatives: to reduce the amount of each installment by maintaining the same period of time as the loan, or to reduce the loan term by keeping the sum of each installment constant.