Early Payment Fees and Pre-payment Charges

There seems to be some confusion these days with terms such as a pre-payment penalty or charge, early payment fee, or mortgage redemption fee. All of these terms in essence mean the same thing, and should be outlined in the terms and conditions for the loan that you are taking out, however, not everyone fully understands what these fees and charges are, and why or how they are assessed.

The Terms and Conditions for a Loan

When you as a borrower apply for and take out a loan, there are certain aspects about the loan that need to be explained to you, some at the time of application, and some at the time the loan is approved, but prior to your signing and agreeing to the loan.

When you apply for a loan, you may be advised that your credit history will be reviewed, and that too many of these credit reviews or inquiries can impact your credit score.

You should also be advised of a representative APR or annual percentage interest rate, which is the interest rate the majority of borrowers receive on their loans; this is no guarantee you will receive this representative interest rate.

It is only there as an example of what you may receive as an interest rate.

Once your loan application has been approved, you will then be given the terms and conditions of that particular loan.

The terms will outline how much you are borrowing, the interest rate, how long the term is for the loan (how long you will make payments), and how much the credit is costing you. In other words, how much will you be paying back in total.

In addition, the terms and conditions of a loan, or the loan contract, can outline a multitude of other facts, aspects, and fees and charges associated with the loan.

Things like late fees, the collection process if you fail to pay and default on the loan, and also, any early payment charges.

Different lenders may use different terms:

* Early payment fee or charge

* Pre-payment fee or charge

* Mortgage or loan redemption fee or charge

* Early payment penalty

* Financial penalty

Whatever term the lender may use, they all mean the same thing: if you pay off the loan early, before its end date, you will be assessed a fee or charge to do so, to leave and pay off the loan early.

You may ask yourself, why? Why be penalised for paying off a loan early?

Why The Early Payment Fees/Charges?

Pre-payment or early payment fees are one-sided in loan contracts, they favour the lender. This does not mean they are totally a bad thing.

May lenders that grant bad credit loans, loans to those borrowers that may not qualify for other loans, make use of the penalties as the interest rates may be higher for a bad credit loan, and the lender wants to unsure they receive the interest back over that time period of the loan.

For the borrower with bad credit, it helps them get the loan they need, and an opportunity to rebuild their credit rating.

For any loan with an early payment clause or fee, the fee is there to insure the borrower keeps the loan and the lender continues to receive the interest they look at as an investment in the loan.

The pre-payment penalty is there as a deterrent to refinance the loan, or pay it off with another loan, or in the example of a mortgage, remortgage to another lender.

Some lenders have provisions in their contracts that if you are remortgaging, or refinancing a loan with the same lender, they may waive, or reduce those early payment charges.

The interest a lender charges a borrower is looked at as profit, and lender don’t want profits to go away.

How These Fees Can Be Assessed and Change Over Time

Early payment fees can be assessed in a variety of ways, and can change over the course and time of the loan.

The penalty can be assessed as one (1) or two (2) month’s interest on the loan.

The fee or charge can change over time, meaning that the longer you have been paying on the loan, there can be a reduction in the early payment fee, sometimes until that fee becomes zero.

For many early payment charges, the earlier you try to pay off a loan, the higher the repayment charges will be, which can make refinancing a loan, or remortgaging a property cost prohibitive.

It is not economically worthwhile to pay the loan off early. It will cost you more in the end.

Of course if the savings by refinancing or paying the loan off early can be captured early in the monthly payments, or over all the pre-payment penalty is not that much, then paying the loan off early may make financial sense.

Not all loans have early pay off or pre-payment penalties/fees, but you need to be aware of them, and they should be disclosed to you at the time the loan is agreed on.

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