As its name indicates, the early repayment of a loan means the fact of completing in advance the partial or total repayment of the maturities of a loan. This is called partial prepayment or full prepayment. The terms and fees applicable in this area are framed by the Consumer Code and the Lagarde Act.
Consumer loans and mortgages can both be subject to early repayment. The conditions of indemnification of the early repayment differ according to the type of loan. For consumer loans, for example, the Lagarde law sets the early repayment amount at 10,000 € per year, from which a financial institution is authorized to apply penalties. The amount of the penalties varies according to the banks, the latter are defined in the loan agreement. The consumer code sets the conditions for early repayment of a home loan. The prepayment costs of a mortgage can not exceed the equivalent of 6 months of interest on the sums already repaid and must never exceed 3% of the outstanding capital. By these provisions the legislator establishes a maximum penalty threshold in case of early repayment. The law allows financial institutions to set the minimum prepayment threshold at 10% of the total loan amount. In this regulatory framework, the penalty clauses are completely negotiable with your bank in the signing phase.
It is more than advisable to do the accounts before making full or partial repayment of loans. First reason and we have just seen, if the amount of penalties is greater than the amount of interest saved the transaction does not present, on a purely accounting basis, absolutely no interest. Secondly, and in an unlikely scenario where the rate of inflation would exceed that of the loan interest rate, there would be no benefit to be paid in advance since the property acquired with the loan would be more valuable thanks to inflation. than the capital remaining due. Finally, in the case of financing made with several loans, including a loan at a zero rate or a reduced rate, the financial institution may choose to allocate prepayments on a loan in priority.
The early repayment of a loan makes it possible in any circumstance to reduce its debt ratio. If the amount of interest saved is greater than the amount of the costs incurred then its benefits are beyond doubt. The higher the interest rate on a loan, the more the borrower will benefit from the effects of early repayment. At the same time, it makes it possible to reduce the loan term.