The financial condition of most citizens leaves much to be desired. According to the M. V. Ptukha Institute of Demography of the National Academy of Sciences of Ukraine, the poverty rate in Ukraine exceeds 50%. One of the easiest ways for a working person to get borrowed funds is to get a loan from a bank. Many solvent citizens apply to the bank to take out a new car or apartment in installments. In addition, businesses also apply for loans to maintain their solvency and production processes.
If the bank’s clients have a financial opportunity to return money before the loan agreement expires, then there is a possibility of early repayment of the loan. Credit history is quite a slippery slope, because even the slightest violation of loan repayments reduces the confidence rating of banks. If you want to avoid negative consequences, reduce loan costs, or shorten the loan term, you can use the option of early repayment of the loan.
What does early repayment of a loan mean?
According to the legislation of Ukraine, the bank must agree to the repayment of borrowed funds by customers ahead of time. However, some banks prescribe a clause in loan agreements stating that if the loan agreement is repaid ahead of schedule, the interest for use is not recalculated, and then the actual benefit for the client is significantly reduced.
Early repayment of a bank loan is an opportunity to fully or partially close the loan body and pay interest for using borrowed funds before the end of the loan agreement. In order to perform such a transaction, the bank’s client must send a written notification/statement of his / her desire to fully / partially pay off the loan ahead of time. The deadline for submitting an application depends on the terms of the bank and the loan amount, but on average-2-4 weeks before the desired contract is closed.
It is possible to close the loan ahead of schedule, either partially or completely. If you repay the loan ahead of schedule, but partially (not the full amount), then interest is calculated on the balance — the debt is recalculated. It is important to warn credit specialists in advance about the desire to pay off part of the loan ahead of schedule, so that in the future the correct recalculation of monthly payments is made and you do not receive penalties.Credit Union ( it consists of the following parts:: loan amount (the amount you received from the bank), interest for using bank funds (the actual profit of the bank), insurance fees and late payment penalties. In case of late payments, the borrower is charged a fine, which must be repaid in one payment.
Under what conditions is early repayment of the loan possible?
The key condition for early repayment of a loan is that such a clause is written in the loan agreement and the client has free finances. If the bank provides for early full / partial repayment, then follow the simple instructions to understand your loan agreement. Much also depends on the type of loan agreement signed with the financial institution. If we are talking about a credit card \ limit, then you can deposit any amount (more than the minimum) and the system will automatically recalculate the interest\payments that need to be made in the future. Additional approvals with banks or written applications are not required.
If a large consumer loan is issued, it is necessary to coordinate early repayment with bank employees. In order to make an early repayment of the loan, you must follow the following procedure:
- Together with the manager, you need to decide on a new loan repayment schedule, although many financial institutions allow customers to make early repayment amounts only between the dates of mandatory payments (or on the date of this payment), so as not to stray from the established schedule;
- If you partially repay the loan ahead of schedule, the subsequent usage amounts will be reduced.
If you managed to fully close the loan ahead of schedule, you will receive an extract on closing the loan agreement on corporate bank letterhead. This document confirms that you have fulfilled all your obligations to the bank, and accordingly, the financial institution has no claims against you.
Is it profitable to repay the loan early?
In most cases, early repayment of the loan is beneficial for the borrower, since the amount of interest paid is recalculated and significantly reduced. A bank client who closes a loan ahead of schedule receives the following benefits:
- the actual cost of the loan is reduced;
- expenses for additional services (property or life insurance of the borrower) are reduced;
- complete freedom to dispose of funds and property that may be secured.
Despite all the advantages and actual benefits of early repayment, there may be a negative aspect to this. Permanent early repayment of loans can negatively affect the credit history, since in fact banks do not receive additional profit.
When is the best time to pay off your loan ahead of schedule?
Much depends on the type of payment: annuity or differential. The contract type is specified in the contract. If it is an annuity agreement, then first of all the amounts are used to pay interest, and accordingly, it is most important to make the maximum amounts at the beginning of the loan agreement in order to reduce subsequent payments.
It is also important to rationally assess your solvency and financial stability. If you are going to give all the available funds to repay the loan, then there is a chance that you will temporarily fall into a financial hole, which will entail obtaining a new loan from a bank or MFI on less favorable terms.
How do I repay my loan ahead of schedule?
The golden rule of family solvency — the loan repayment should not take more than 20% of the family income. It is this amount that allows you to safely pay off your financial obligations, while not experiencing difficulties due to lack of resources. If the loan repayment takes more than 50% of the family income, then the situation is deplorable and it is necessary to look for ways to increase income.
We suggest you remember and save the rules for successful early repayment of the loan:
- don’t go beyond the payment schedule. Usually, it takes 3-4 days to deposit funds, but it is most important to avoid delays, as penalties, fines, and a credit rating downgrade will follow.
- if the payment is made automatically, then add an additional 10% to the monthly payment;
- create your own financial safety cushion or insurance reserve, which can be deposited to the bank if there are no available funds on the payment date;
- look for new sources of income, but don’t cut costs;
- do not play with currency risks during the loan;
- use refinancing if you have multiple loan agreements.
A large part of the population in Ukraine is faced with lending, and it is extremely important to treat this procedure responsibly. Making several loans in one period is a direct route to a credit hole, and early repayment of loans is the only way to improve your financial situation and improve your level of solvency.